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on Utility Models and Prospect Theory |
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Issue of 2020‒02‒17
eighteen papers chosen by |
| By: | Chiaki Hara (Institute of Economic Research, Kyoto University) |
| Abstract: | Given two pairs of expected utility functions, we formalize the notion that one expected utility function is more risk-averse than the other in the first pair to a greater extent than in the second pair. We do so by assuming that the utility functions are twice continuously differentiable and satisfy the Inada condition, and, in each of the two pairs, using the function that transforms the derivatives of one expected utility function to the derivatives of the other, rather than the function that transforms one expected utility function to the other. This definition allows us to interpret the quantitative results on the ambiguity aversion coefficients of the smooth ambiguity model of Klibanoff, Marinacci, and Mukerji (2005) in some cases not covered by the more-ambiguity-averse-than relation that they conceived. |
| Keywords: | Expected utility functions, risk aversion, ambiguity aversion, smooth ambiguity model |
| JEL: | C38 D81 G11 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1019&r=all |
| By: | Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna, Austria and Thompson Rivers University, Kamloops,BC, Canada); Tsigaris, Panagiotis (Thompson Rivers University, Kamloops,BC, Canada) |
| Abstract: | In this paper we examine capital income taxation of a reference dependent sufficiently loss averse investor in a two period portfolio choice model under full loss offset provisions. Capital income taxation with loss offset provisions has been found to stimulate risk taking in expected utility models under certain assumptions about attitudes towards risk but would such effect be found under prospect theory type of preferences? We observe that the impact of capital income taxation depends on investors’ reference levels relative to their endowment income and thus we explore capital income taxation for different types of loss averse investors in terms of their ambition. We consider the less ambitious investors to be the ones with relatively low reference levels (they avoid relative losses in both periods) and more ambitious investors to be those with relatively high reference levels. We analyze two types of more ambitious investors: investors with higher time preference (who experience relative losses only in the second period under the bad state of nature) and investors with lower time preference (who experience relative losses only in the first period). We observe that capital income taxation stimulates current consumption in most cases which encourages risk taking, although the final outcome would depend on the investors’ degree of risk aversion, the rate of time preference and the tax rate in relation to certain thresholds. Current consumption could be discouraged for some ambitious type of investors that have relatively high second period reference levels but not necessary first period reference levels. In summary, to determine the impact of capital income taxation on the decision variables the reference levels in relation to endowment income play the most significant role. Ignoring reference depended preferences can lead to different conclusions for investors reaction to capital income taxation. We also find certain type of investors whose happiness level increases with capital income taxation under full loss offset provisions. |
| Keywords: | Prospect theory, loss aversion, consumption-savings decision, capital income tax |
| JEL: | G02 G11 H2 E20 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:11&r=all |
| By: | Piccoli, Luca; Tiezzi, Silvia (University of Siena) |
| Abstract: | This paper deals with one of the main empirical problems associated with the rational addiction theory, namely that its derived demand equation is not empirically distinguishable from models with forward looking behavior, but with time inconsistent preferences. The implication is that, even when forward looking behavior is supported by data, the standard rational addiction equation cannot distinguish between time consistency and inconsistency in preferences. We show that an encompassing general specification of the rational addiction model embeds the possibility of testing for time consistent versus time inconsistent naïve agents. We use a panel of Russian individuals to estimate a rational addiction equation for tobacco with time inconsistent preferences, where GMM estimators deal with errors in variables and unobserved heterogeneity. The results conform to the theoretical predictions and the proposed test for time consistency does not reject the hypothesis that Russian cigarettes consumers discount future utility exponentially. We further show that the proposed empirical specification of the Euler equation, whilst being indistinguishable from the general empirical specification of the rational addiction model, it allows to identify more structural parameters, such as an upper-bound for the parameter capturing present bias in time preferences. |
| Keywords: | rational addiction, general versus standard specification, time consistency, naïveté, GMM |
| JEL: | C23 D03 D12 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12906&r=all |
| By: | Tanaka, Yasuhito |
| Abstract: | We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under perfect competition with decreasing or constant returns to scale technology. We show that there exists involuntary unemployment even when labor supply is divisible. We consider homothetic utility functions of consumers including log-linear function. |
| Keywords: | involuntary unemployment, perfect competition, divisible labor supply |
| JEL: | E12 E24 |
| Date: | 2020–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98407&r=all |
| By: | Laurent Botti (CAEPEM - Centre d'Analyse de l'Efficience et de la Performance en Economie et Management - UPVD - Université de Perpignan Via Domitia); Linjia Zhang (Xi'an Jiaotong-Liverpool University [Suzhou]); Sylvain Petit (UPF - Université de la Polynésie française, GDI - Gouvernance et développement insulaire - UPF - Université de la Polynésie Française, IDP - Institut du Développement et de la Prospective - EA 1384 - UPHF - Université Polytechnique Hauts-de-France - IAE - Institut d'Administration des Entreprises) |
| Abstract: | This paper presents a two-step framework for the selection of the optimal tourist origins portfolio for a particular destination. The paper applies this decision-making process to French Polynesia. The first step of the framework is based on a mean-variance optimization procedure and proposes the subset of portfolios among which the decision-maker must limit her-his choice. Second, the multi-criteria ELECTRE method is employed to rank all the portfolios considered on the basis of decision-makers' preferences exposed in the parameters of the algorithm. Three decision-maker profiles are proposed from a risk-averse profile to a risk-lover profile. This paper contributes to the dedicated literature by presenting ELECTRE III as an alternative to the utility function approach used by previous studies. Results of our application to French Polynesia's tourist attendance data (from 2014 to 2017) highlight the usefulness of the framework exhibited and empirically underline the economic perspectives offered by Chinese tourists. The French Polynesian application follows a clear presentation permitting consideration of applications to other destinations. |
| Keywords: | Performance,Multi Criteria Decision Making (MCDM),ELECTRE,Mean- Variance approach 2 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02401461&r=all |
| By: | Nyassoke Titi Gaston Clément (Université de Douala); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala) |
| Abstract: | In this paper, we focus on the farmer's risk income, by using commodity futures, when price and output processes are correlated random represented by jump-diffusion models. We evaluate the expected utility of the farmer's wealth and we determine, at each instant of time, the optimal consumption rate and hedge position at given the time to harvest and state variables. We find a closed form optimal position of consumption and position rate in case of CARA utility investor. This result (see table 1.5) is a generalization of Ho (1984) result who consider the particular case where price and output are diffusion models. |
| Keywords: | Jump-diffusion process,futures,stochastic dynamic programming,Lévy measure,risk management |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02417401&r=all |
| By: | Nicole B\"auerle; Gregor Leimcke |
| Abstract: | In this paper we consider an optimal investment and reinsurance problem with partially unknown model parameters which are allowed to be learned. The model includes multiple business lines and dependence between them. The aim is to maximize the expected exponential utility of terminal wealth which is shown to imply a robust approach. We can solve this problem using a generalized HJB equation where derivatives are replaced by generalized Clarke gradients. The optimal investment strategy can be determined explicitly and the optimal reinsurance strategy is given in terms of the solution of an equation. Since this equation is hard to solve, we derive bounds for the optimal reinsurance strategy via comparison arguments. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2001.11301&r=all |
| By: | Tanaka, Yasuhito |
| Abstract: | We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under monopolistic competition with increasing or constant returns to scale technology and homothetic preferences of consumers. Indivisibility of labor supply may be a ground for the existence of involuntary unemployment. However, we show that under some conditions there exists involuntary unemployment even when labor supply is divisible. |
| Keywords: | involuntary unemployment, monopolistic competition, divisible labor supply. |
| JEL: | E12 E24 |
| Date: | 2020–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98406&r=all |
| By: | Tanaka, Yasuhito |
| Abstract: | We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under perfect competition with decreasing or constant returns to scale technology. Indivisibility of labor supply may be a ground for the existence of involuntary unemployment. However, we show that under some conditions there exists involuntary unemployment even when labor supply is divisible. |
| Keywords: | involuntary unemployment, perfect competition, divisible labor supply |
| JEL: | E12 E24 |
| Date: | 2020–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98405&r=all |
| By: | Khmelnitskaya, Anna; Selcuktu, Ozer; Talman, A.J.J. (Tilburg University, School of Economics and Management) |
| Abstract: | We introduce a single-valued solution concept, the so-called average covering tree value, for the class of transferable utility games with limited communication structure represented by a directed graph. The solution is the average of the marginal contribution vectors corresponding to all covering trees of the directed graph. The covering trees of a directed graph are those (rooted) trees on the set of players that preserve the dominance relations between the players prescribed by the directed graph. The average covering tree value is component efficient, and under a particular convexity-type condition it is stable. For transferable utility games with complete communication structure the average covering tree value equals to the Shapley value of the game. If the graph is the directed analog of an undirected graph the average covering tree value coincides with the gravity center solution. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:df006318-c4d7-4ab2-ab07-a9c8a90a4b3a&r=all |
| By: | María J. Prados (University of Southern California); Arie Kapteyn (University of Southern California) |
| Abstract: | Americans face the challenges of retirement with varying degrees of preparation. Evidence indicates that that many individuals may not be making the best possible choices with respect to their Social Security and retirement savings. We assess the subjective expectations of non-retirees and find that they have sizable biases and uncertainty about future retirement benefits. This uncertainty and the level of subjective expectations can affect workers’ wealth accumulation and retirement readiness. We build on these observations and combine unique survey data with a life-cycle optimization model to measure the role of Social Security literacy, subjective expectations about retirement benefits, and behavioral traits as determinants of life-cycle savings decisions and welfare. The goal of this project is to better understand the role of retirement expectations as determinants of savings decisions and retirement income. We forecast future benefits and measure the bias in expectations. We find heterogeneity in the direction of the expectation bias: Men and those with low levels of uncertainty about retirement benefits are less likely to overestimate their future retirement benefits, hence are more likely to save more and reach retirement better prepared. We find that these biases in subjective expectations translate into suboptimal asset accumulation and welfare losses. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp405&r=all |
| By: | Zoulkiflou Moumouni (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier) |
| Abstract: | In static framework, many hedging strategies can be settled following the various hedge ratios that have been developed in the literature. However, it is difficult to choose among them the best the appropriate strategy according the to preference or economic behavior of the decision-maker such as prudence and temperance. This is so even with the hedging effectiveness measure. After introducing a hedging ratio that take into account the prudence and temperance of the decision maker, we propose a ranking based approach to measure the effectiveness using L-moment to classify hedge portfolios, hence hedge ratios, with regard to their performance. Moreover, we deal with the hedging issue in presence of quantity and rollover risks and derive an optimal strategy that depends upon the basis and insurance contract. Such hedging issue includes the relevant risks encountered in practice and we relate how insurance contract, specially designed for production risk could affect the futures hedge. The application on futures prices data at hands shows that taking into account quantity and rollover risks leads to better hedging strategy based on the L-performance effectiveness measure. |
| Keywords: | Risk Management,Futures Markets,Commodities,Risk Aversion |
| Date: | 2019–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02417459&r=all |
| By: | Christoph Engel; Alexandra Fedorets; Olga Gorelkina |
| Abstract: | Individuals often have to decide to which degree of risk they want to expose others, or how much risk to accept if their choice has an externality on third parties. One typical application is a household. We run an experiment in the German Socio-Economic Panel with two members from 494 households. Participants have a good estimate of each other’s risk preferences, even if not explicitly informed. They do not simply match this preference when deciding on behalf of the other household member, but shy away from exposing others to risk. We model the situation, and we find four distinct types of individuals, and two distinct types of households. |
| Keywords: | risk preference, household, reticence to expose others to risk, tradeoff between individual and foreign risk preference |
| JEL: | C45 D13 D81 D91 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:20186&r=all |
| By: | Franz Dietrich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Christian List (LSE - London School of Economics and Political Science) |
| Abstract: | Agents are often assumed to have degrees of belief ("credences") and also binary beliefs ("beliefs simpliciter"). How are these related to each other? A much-discussed answer asserts that it is rational to believe a proposition if and only if one has a high enough degree of belief in it. But this answer runs into the "lottery paradox": the set of believed propositions may violate the key rationality conditions of consistency and deductive closure. In earlier work, we showed that this problem generalizes: there exists no local function from degrees of belief to binary beliefs that satisfies some minimal conditions of rationality and non-triviality. "Locality" means that the binary belief in each proposition depends only on the degree of belief in that proposition, not on the degrees of belief in others. One might think that the impossibility can be avoided by dropping the assumption that binary beliefs are a function of degrees of belief. We prove that, even if we drop the "functionality" restriction, there still exists no local relation between degrees of belief and binary beliefs that satisfies some minimal conditions. Thus functionality is not the source of the impossibility; its source is the condition of locality. If there is any non-trivial relation between degrees of belief and binary beliefs at all, it must be a "holistic" one. We explore several concrete forms this "holistic" relation could take. |
| Abstract: | Il est souvent supposé que des acteurs ont à la fois des degrés de croyance (des « probabilités subjectives ») et des croyances binaires (« croyances » simplement). Comment sont-ils reliés ? Une réponse discutée est qu'il faut croire une proposition si et seulement si l'on a une probabilité subjective suffisamment haute en cette proposition. Mais cette réponse amène au paradoxe de loterie ("lottery paradox") : l'ensemble des propositions crues peut violer deux conditions de rationalité centrales, la cohérence et la clôture déductive. Dans un travail antérieur nous avions généralisé ce paradoxe : il n'existe aucune fonction de binarisation des croyances qui soit "locale" et satisfait des conditions de rationalité et de non trivialité. On aurait pu croire que cette impossibilité puisse être évitée en enlevant la restriction que les croyances binaires sont une fonction des probabilités subjectives. Dans ce papier nous généralisons l'impossibilité en supprimant la restriction de fonctionnalité, c'est-à-dire en partant non pas d'une fonction de binarisation mais d'une relation quelconque entre les deux types de croyances. Ceci montre que la fonctionnalité n'est pas le source du paradoxe de loterie. La seule source en est la « localité ». Nous explorons une série de relations non locales (holistes) entre les deux types de croyances. |
| Keywords: | binary beliefs (yes/no),subjective probabilities,construction of binary beliefs from subjective probabilities,impossibility theorem,croyances binaires (oui/non),probabilités subjectives,construction de croyances binaires à partir des probabilités subjectives,théorème d'impossibilité |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01999527&r=all |
| By: | Jorge Miranda-Pino (University of Queensland); Daniel Murphy (University of Virginia Darden School of Business); Eric R. Young (Carnegie Mellon University; University of Virginia); Kieran Walsh (Darden Graduate School of Business Administration; Yale University; Vassar College) |
| Abstract: | We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines. |
| Keywords: | D14; E21 |
| Date: | 2020–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:87435&r=all |
| By: | Michal Bauer; Julie Chytilova; Edward Miguel |
| Abstract: | Can a short survey instrument reliably measure a range of fundamental economic preferences across diverse settings? We focus on survey questions that systematically predict behavior in incentivized experimental tasks among German university students (Becker et al. 2016) and were implemented among representative samples across the globe (Falk et al. 2018). This paper presents results of an experimental validation conducted among low-income individuals in Nairobi, Kenya. We find that quantitative survey measures -- hypothetical versions of experimental tasks -- of time preference, attitude to risk and altruism are good predictors of choices in incentivized experiments, suggesting these measures are broadly experimentally valid. At the same time, we find that qualitative questions -- self-assessments -- do not correlate with the experimental measures of preferences in the Kenyan sample. Thus, caution is needed before treating self-assessments as proxies of preferences in new contexts. |
| Keywords: | preference measurement; experiment; survey; validation; |
| JEL: | C83 D90 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp653&r=all |
| By: | Kang, Liying; Khmelnitskaya, Anna; Shan, Erfang; Talman, A.J.J. (Tilburg University, Center For Economic Research); Zhang, Guang (Tilburg University, Center For Economic Research) |
| Abstract: | We consider transferable utility cooperative games (TU games) with limited cooperation introduced by hypergraph communication structure, the so-called hypergraph games. A hypergraph communication structure is given by a collection of coalitions, the hyperlinks of the hypergraph, for which it is assumed that only coalitions that are hyperlinks or connected unions of hyperlinks are able to cooperate and realize their worth. We introduce the average tree value for hypergraph games, which assigns to each player the average of the player's marginal contributions with respect to a particular collection of rooted spanning trees of the hypergraph. We also provide axiomatization of the average tree value for hypergraph games on the subclasses of cycle-free hypergraph games, hypertree games and cycle hypergraph games. |
| Keywords: | TU game; hypergraph communication structure; average tree value; component fairness |
| JEL: | C71 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:331f101b-09ee-47d6-afdf-eccae8767583&r=all |
| By: | Justin Dzuche (Université de Douala); Christian Deffo Tassak (Université de Yaoundé I [Yaoundé]); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala) |
| Abstract: | Iwamura [18] introduced a new parametric fuzzy measure as a convex linear combination of possibility and necessity measures. This measure generalizes the credibility measure and the parameter of the possibility measure is considered as the decision making (investors) optimism's level. In this paper, we introduce by means of that mea-sure two new dominances (binary relations) on fuzzy variables. The first one generalizes the first order dominance introduced recently by Tassak et al. [17] and the second one, based on optimism's level and called optimisnism dominance, is stronger than the first one. We study properties of these dominances on trapezoidal fuzzy numbers and we characterize them. We implement the optiminism dominance in a nu-merical example to display that its set of efficient portfolios enlarges the set of efficient portfolios obtained by Tassak et al. [17] through their first order dominance. |
| Keywords: | Fuzzy variable,Parametric fuzzy measure,Generalized Firstorder dominance,Optiminism Dominance,Set of best portfolios |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02433438&r=all |