nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2020‒01‒27
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Fundamental Utilitarianism and Intergenerational Equity with Extinction Discounting By Chichilnisky, Graciela; Hammond, Peter J.; Stern, Nicholas
  2. ResLogit: A residual neural network logit model By Melvin Wong; Bilal Farooq
  3. The Rational Group By Franz Dietrich
  4. Long term care insurance with state-dependent preferences By DE DONDER Philippe,; LEROUX Marie-Louise,
  5. Revealing attention - how eye movements predict brand choice and moment of choice By Martinovici, A.
  6. Evolution towards higher net profit in a population of ensembles of ensembles leads to division of labour By Friedrich, Thomas
  7. Time vs. Risk Preferences, Bank Liquidity Provision and Financial Fragility By Ettore Panetti
  8. Expected Value Under Normative Uncertainty By Franz Dietrich; Brian Jabarian

  1. By: Chichilnisky, Graciela (Columbia University); Hammond, Peter J. (University of Warwick); Stern, Nicholas (LSE)
    Abstract: Ramsey famously condemned discounting “future enjoyments” as “ethically indefensible”. Suppes enunciated an equity criterion which, when social choice is utilitarian, implies giving equal weight to all individuals’ utilities. By contrast, Arrow (1999a, b) accepted, perhaps reluctantly, what he called Koopmans’ (1960) “strong argument” implying that no equitable preference ordering exists for a sufficiently unrestricted domain of infinite utility streams. Here we derive an equitable utilitarian objective for a finite population based on a version of the Vickrey–Harsanyi original position, where there is an equal probability of becoming each person. For a potentially infinite population facing an exogenous stochastic process of extinction, an equitable extinction biased original position requires equal conditional probabilities, given that the individual’s generation survives the extinction process. Such a position is well-defined if and only if survival probabilities decline fast enough for the expected total number of individuals who can ever live to be finite. Then, provided that each individual’s utility is bounded both above and below, maximizing expected “extinction discounted” total utility — as advocated, inter alia, by the Stern Review on climate change — provides a coherent and dynamically consistent equitable objective, even when the population size of each generation can be chosen.
    Keywords: Discounting ; time perspective ; fundamental preferences ; fundamental utilitarianism ; consequentialization ; Vickrey–Harsanyi original position ; Suppes equity ; intergenerational equity ; sustainable preferences ; extinction discounting.
    JEL: D63 D70 D90 Q54 Q56
    Date: 2019
  2. By: Melvin Wong; Bilal Farooq
    Abstract: We present a Residual Logit (ResLogit) model for seamlessly integrating a data-driven Deep Neural Network (DNN) architecture in the random utility maximization paradigm. DNN models such as the Multi-layer Perceptron (MLP) have shown remarkable success in modelling complex data accurately, but recent studies have consistently demonstrated that their black-box properties are incompatible with discrete choice analysis for the purpose of interpreting decision making behaviour. Our proposed machine learning choice model is a departure from the conventional feed-forward MLP framework by using a dynamic residual neural network learning based approach. Our proposed method can be formulated as a Generalized Extreme Value (GEV) random utility maximization model for greater flexibility in capturing unobserved heterogeneity. It can generate choice model structures where the covariance between random utilities is estimated and incorporated into the random error terms, allowing for a richer set of higher-order substitution patterns than a standard logit might be able to achieve. We describe the process of our model estimation and examine the relative empirical performance and econometric implications on two mode choice experiments. We analyzed the behavioural and theoretical properties of our methodology. We showed how model interpretability is possible, while also capturing the underlying complex and unobserved behavioural heterogeneity effects in the residual covariance matrices.
    Date: 2019–12
  3. By: Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Can a group be a standard rational agent? This would require the group to hold aggregate preferences which maximise expected utility and change only by Bayesian updating. Group rationality is possible, but the only preference aggregation rules which support it (and are minimally Paretian and continuous) are the linear-geometric rules, which combine individual tastes linearly and individual beliefs geometrically.
    Date: 2020–01–08
  4. By: DE DONDER Philippe, (Toulouse School of Economics); LEROUX Marie-Louise, (Université du Québec à Montréal)
    Abstract: We study the demand for actuarially fair Long Term Care (LTC hereafter) insurance in a setting where autonomous agents only care for daily life consumption while dependent agents also care for LTC expenditures. We assume that dependency decreases the marginal utility of daily life consumption. We fi rst obtain that some agents optimally choose not to insure themselves, while no agent wishes to buy complete insurance. We then show that the comparison of marginal utility of income (as opposed to consumption) across health states depends on (i) whether agents do buy LTC insurance at equilibrium or not, (ii) the comparison of the degree of risk aversion for consumption and for LTC expenditures, and (iii) the income level of agents. Our results then off er testable implications that can explain (i) why few people buy Long Term Care insurance and (ii) the discrepancies between various empirical works when measuring the extent of state-dependent preferences for LTC.
    Keywords: long term care insurance puzzle, actuarially fair insurance, risk aversion
    JEL: D11 I13
    Date: 2019–12–17
  5. By: Martinovici, A. (Tilburg University, School of Economics and Management)
    Abstract: This dissertation contains three empirical essays on the role of attention in consumer choice. The models developed in this dissertation propose that attention reveals moment-to-moment utility accumulation processes that take place during choice. The first essay investigates which fundamental attention processes contribute to the accumulation of utility and brand choice. The results show that certain types of attention (e.g. attention for integration) are better able to reflect brand utilities, and brand loyalty manifests itself via attention. Essay 2 looks into the link between attention, brand choice, and moment of choice and proposes a model where both brand and search utilities change from moment to moment as more eye movements are observed. This provides insights into consumer heterogeneity in decision thresholds and implicitly decision duration, and test different drivers of brand choice and moment of choice. In essay 3, brand utilities are decomposed into two components that capture the importance of the attributes that describe the brands and the subjective value that the consumer attaches to the attribute levels corresponding to each of the brands on display. The results show that eye movements reflect not only how the consumer evaluates the brands, but also why some brands are preferred by identifying which attributes are considered more important over time.
    Date: 2019
  6. By: Friedrich, Thomas
    Abstract: In this model the basic ensemble consists of a source and a sink, three basic ensembles constitute an organism or company (both an ensemble of ensembles) and nine organisms/companies form a population or a branch of industry. Each organism is composed of either connected or unconnected ensembles. Linear cost-functions and saturating benefit-functions create superadditivity (better net profit) through a rational and peaceful transfer of substrate within a basic ensemble. Transfers by force and deception are not jet considered. All ensembles have an identical and limited concentration range and all concentrations are of the same probability. Random mutations change cost factors (cf), Michaelis-Menten constants (Km) and the maximal reaction velocities (Vmax) in source and sink of the basic ensemble. Km and Vmax shape a saturating benefit-function in Michaelis-Menten type enzyme kinetics resembling the utility function in economics. The result of mutations in the basic ensemble is a higher or lower cumulative superadditivity of an organism/company and its master if installed. The most effective organisms or masters prevail within the population. Recombination of ensembles between organisms accelerates evolution. Independent of the starting point and with or without a fix cost I observe the evolution towards strong asymmetry and inequality with a division of labour resulting in the development of a collector and a manufacturer. Although I observe a win-win situation reciprocity will become a necessity.
    Keywords: ensemble, transfer space, benefit, cost, utility, net profit, mutation, recombination, division of labour, asymmetry, inequality, quantity to quality transition, complexity
    JEL: A19 P40
    Date: 2018–03–27
  7. By: Ettore Panetti
    Abstract: How important is it to distinguish relative risk aversion (RRA) from the intertemporal elasticity of substitution (IES) to understand bank liquidity provision and financial fragility? To answer this question, I develop a banking theory in which depositors feature Epstein-Zin preferences. In equilibrium, banks provide liquidity when RRA is sufficiently high (low) only for IES larger (smaller) than 1. Under the same conditions, banks might be fragile, i.e. subject to possible self-fulfilling depositors' runs. A time-consistent deposit freeze resolves banks' fragility if RRA is sufficiently low and IES is sufficiently larger than 1.
    JEL: D81 G21 G28
    Date: 2019
  8. By: Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Brian Jabarian (UP1 UFR10 - Université Panthéon-Sorbonne - UFR Philosophie - UP1 - Université Panthéon-Sorbonne)
    Abstract: Maximising expected value is the classic doctrine in choice theory under empirical uncertainty, and a prominent proposal in the emerging philosophical literature on normative uncertainty, i.e., uncertainty about the standard of evaluation. But how should Expectationalism be stated in general, when we can face both uncertainties simultaneously , as is common in life? Surprisingly, different possibilities arise, ranging from Ex-Ante to Ex-Post Expectationalism, with several hybrid versions. The difference lies in the perspective from which expectations are taken, or equivalently the amount of uncertainty packed into the prospect evaluated. Expectationalism thus faces the classic dilemma between ex-ante and ex-post approaches, familiar elsewhere in ethics and aggregation theory under uncertainty. We analyse the spectrum of expectational theories, showing that they reach diverging evaluations, use different modes of reasoning, take different attitudes to normative risk as well as empirical risk, but converge under an interesting (necessary and sufficient) condition.
    Date: 2020–01–08

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