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on Utility Models and Prospect Theory |
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Issue of 2020‒03‒30
ten papers chosen by |
| By: | Sproule, Robert A. |
| Abstract: | In the study of Giffen behavior or "Giffenity", there remains a paradox. On one hand, the Wold-Juréen (Demand analysis: A study in Econometrics, 1953) utility function has been touted as the progenitor of a multi-decade search for those two-good, particular utility functions, which exhibit Giffenity. On the other hand, there is no evidence that the Wold- Juréen (1953) utility function has ever been fully evaluated for Giffenity, with perhaps one minor exception, Weber (The case of a Giffen good: Comment, 1997). But there, Weber (1997) showed that the Giffenity of Good 1 depends upon the relative magnitude of income vis-à-vis the price of Good 2. Weber's precondition is so vague that it lacks broad appeal. This paper offers a new and a clear cut precondition for Giffen behavior under the Wold-Juréen (1953) utility function. That is, the author shows that if the price of Good 1 is greater than or equal to the price of Good 2, then Good 1 is a Giffen good. |
| Keywords: | Slutsky decomposition,Giffen paradox,Wold-Juréen (1953) utility function |
| JEL: | A22 A23 D11 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20204&r=all |
| By: | Harin, Alexander |
| Abstract: | The two goals of the present article are: 1) To define transformations (named here as auto-transformations) of the probability density functions of random variables (or other functions) into similar functions having smaller sizes of their domains. 2) To research and outline basic features of these transformations. In particular, auto-transformations from infinite to finite domains are analyzed. The goals are caused by the well-known problems of behavioral sciences. |
| Keywords: | probability; variance; noise; bias; measurement; utility theory; prospect theory; behavioral economics; psychology; decision sciences; social sciences; |
| JEL: | C0 C02 C1 C18 D8 D81 |
| Date: | 2020–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99286&r=all |
| By: | Sanyyam Khurana (Department of Economics, Delhi School of Economics) |
| Abstract: | In this paper, we characterize all the Bayesian equilibria of a firstprice auction for asymmetric bidders with risk averse preferences. The necessary conditions for an equilibrium are pure strategy, continuity and strict monotonicity. Next, we show that first-order stochastic dominance is a necessary condition and conditional stochastic dominance is a sufficient condition to unambiguously rank the bidding strategies. We establish bidders’ preferences for the first-price and the second-price auction under different types of risk aversion. Finally, for a special family of utility functions and distribution functions, we study the impact of asymmetry on seller’s revenue in a first-price auction. |
| JEL: | D44 D82 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:304&r=all |
| By: | Hjertstrand, Per (Research Institute of Industrial Economics (IFN)); Swofford, James L. (Department of Economics and Finance); Whitney, Gerald A. (Department of Economics and Finance) |
| Abstract: | We propose more general non-parametric revealed preference tests for weak separability and utility maximization with incomplete adjustment. Hence, these procedures account for a decision maker’s inability to adjust his optimal allocation of the demanded goods and assets. Incomplete adjustment is especially important when modelling preferences of durable goods and assets. The procedures are based on a computationally attractive integer programming approach. Two empirical applications show that it is important to account for incomplete adjustment in consumer demand models of durable consumption goods and monetary assets. |
| Keywords: | Aggregation; Incomplete Adjustment; Revealed Preference; Weak Separability |
| JEL: | C14 C60 D01 D10 E40 |
| Date: | 2020–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1327&r=all |
| By: | Martyna Kobus (Polish Academy of Sciences); Marek Kapera (Polish Academy of Sciences); Vito Peragine (University of Bari) |
| Abstract: | This paper develops a normative approach to the measurement of ex-ante inequality of opportunity in a multidimensional setting, i.e., when the individual outcome is represented by a multidimensional variable. We characterize three classes of social welfare functions, all endorsing ex ante compensation but each of them reflecting a specific reward principle: (1) utilitarian, (2) agnostic and (3) averse. The first class is implemented via generalized Lorenz Dominance applied to each attribute separately. The agnostic and inequality averse classes are implemented by a welfarist Lorenz ordering, namely, of type-aggregate utilities. In the case of inequality-averse class, utility functions are submodular, hence capturing the dependence between attributes. We also develop normative inequality indices (Atkinson, 1970; Kolm 1969; Sen, 1973) for the classes of welfare functions and study their properties. Finally, we propose an empirical applications of the methods developed in the paper: by using the National Longitudinal Study of Adolescent to Adult Health (Add Health) we evaluate inequality of opportunity in U.S. for the case of three dimensions of individual outcomes, namely, education, health and income. |
| Keywords: | Equality of opportunity; economic inequality; multidimensional welfare; multidimensional inequality; Lorenz dominance.. |
| JEL: | D63 I32 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2020-528&r=all |
| By: | Oleksii Mostovyi |
| Abstract: | We investigate the dynamic stability of the indirect utility process associated with a (possibly suboptimal) trading strategy under perturbations of the market. Establishing the reverse conjugacy characterizations first, we prove continuity and first-order convergence of the indirect-utility process under simultaneous perturbations of the finite variation and martingale parts of the return of the risky asset. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2002.09445&r=all |
| By: | Qingyin Ma; Alexis Akira Toda |
| Abstract: | We prove that the consumption functions in income fluctuation problems are asymptotically linear if the marginal utility is regularly varying. We also analytically characterize the asymptotic marginal propensities to consume (MPCs) out of wealth and derive necessary and sufficient conditions under which they are 0, 1, or are somewhere in between. When the return process with time-varying volatility is calibrated from data, the asymptotic MPCs can be zero with moderate risk aversion. Our results potentially explain why the saving rates among the rich are positive and increasing in wealth. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2002.09108&r=all |
| By: | Robin Cubitt (University of Nottingham); Orestis Kopsacheilis (University of Nottingham); Chris Starmer (University of Nottingham, School of Economics) |
| Abstract: | According to the Description-Experience gap (DE gap), people act as if overweighting rare events when information about those events is derived from descriptions but as if underweighting rare events when they experience them through a sampling process. Due to the variety of experimental designs and measures reported in previous literature, the nature, causes and implications of the phenomenon for economic theory remain unclear. We present a new experiment which examines in a unified design four distinct causal mechanisms that might drive the DE gap, attributing it respectively to information differences (sampling bias), to a feature of preferences (ambiguity sensitivity) or to aspects of cognition (likelihood representation and memory). Our design permits model-free and model-mediated tests for these mechanisms and for the DE gap itself. Using a model-free approach, we elicit a DE gap similar in direction and size to the literature’s average and find that, when each factor is considered in isolation, sampling bias stemming from under-represented rare events, is the only significant driver. Yet, model-mediated analysis shows that rare events are overweighted even in experience. Moreover, this level of analysis reveals the potential of a smaller DE gap, existing even without information differences. |
| Keywords: | Decisions from Description, Decisions from Experience, Risk Preferences, Cumulative Prospect Theory, Ambiguity |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2019-15&r=all |
| By: | Hubert J. Kiss (Department of Economics, Eotvos Lorand University.); Ismael Rodriguez-Lara (Department of Economic Theory and Economic History, University of Granada.); Alfonso Rosa-Garcia (Department of Economics, University of Murcia.) |
| Abstract: | We study how lines form in front of banks. In our model, depositors choose first the level of effort to arrive early at the bank and then whether or not to withdraw their deposit. We argue that the informational environment (i.e. the possibility of observing the action of others) affects the emergence of bank runs and should, therefore, influence the line formation. We test it experimentally and find that the informational environment has no effect on the line formation, while expectations on the occurrence of bank runs, irrationality of depositors and their loss aversion are important factors to explain it. |
| Keywords: | bank run, beliefs, experimental economics, line formation, loss aversion, observability. |
| JEL: | C91 D90 G21 J16 |
| Date: | 2020–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:20/02&r=all |
| By: | Raymond Boadi Frempong; David Stadelmann |
| Abstract: | The literature suggests that the household invests in the human capital of a child member not only for altruistic reasons but also as insurance against future income shocks. Hence, the allocation of the child’s time between school and work is a function of the risk preference of the household head. This paper estimates the effect of parental risk preference on child labour decisions in the household using recall information on child labour and a risk elicitation question. We address endogeneity issues by applying an instrumental variable estimation technique. We find that risk-averse households are more likely to send their children to work. Further analyses suggest that such outcomes are driven by the need to maximise the household’s expected income from the child. Evidence from instrumental variable regressions indicates that the relationship between risk aversion and child labour is causal and that risk aversion induces higher probabilities of children working. |
| Keywords: | altruism; child labour; household welfare; human capital; risk preference; uncertainties |
| JEL: | D13 D64 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2020-02&r=all |