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on Utility Models and Prospect Theory |
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Issue of 2020‒05‒18
nineteen papers chosen by |
| By: | Florian Brandl |
| Abstract: | We study preference aggregation under uncertainty when individual and collective preferences are based on subjective expected utility. A natural procedure for determining the collective preferences of a group then is to average its members' beliefs and add up their $(0,1)$-normalized utility functions. This procedure extends the well-known relative utilitarianism to decision making under uncertainty. We show that it is the only aggregation function that gives tie-breaking rights to agents who join a group and satisfies an independence condition in the spirit of Arrow's independence of irrelevant alternatives as well as four undiscriminating axioms. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.03693&r=all |
| By: | Federica Ceron (UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); Vassili Vergopoulos (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics) |
| Abstract: | We provide an axiomatic characterization of recursive Maxmin preferences that stem from (possibly) incomplete preferences representing choices that are justified by hard evidence. The decision-maker disposes of objective probabilistic information that may induce dynamically inconsistent behavior. To ensure that her choices be informed by objective information, dynamically consistent, and ambiguity averse, she constructs her subjective set of priors as the rectangular hull of the objective information set. The characterization builds upon two axioms that naturally combine these three requirements in a behavioral way. Moreover, our main result suggests a principled justification for the use of recursive Maxmin preferences in applications to dynamic choice problems. |
| Keywords: | Rectangularity,Rectangularization,Maxmin Expected Utility,Unanimity Rule,Dynamic Consistency,Prior-by-prior Updating,Objective and Subjective Rationality Keywords: Rectangularity,Unanim- ity Rule,Objective and Subjective Rationality JEL classification: D81 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02563318&r=all |
| By: | Wong, Stephen D; Chorus, Caspar G; Shaheen, Susan A; Walker, Joan L |
| Abstract: | Regret is often experienced for difficult, important, and accountable choices. Consequently, we hypothesize that random regret minimization (RRM) may better describe evacuation behavior than traditional random utility maximization (RUM). However, in many travel related contexts, such as evacuation departure timing, specifying choice sets can be challenging due to unknown attribute levels and near-endless alternatives, for example. This has implications especially for estimating RRM models, which calculates attribute-level regret via pairwise comparison of attributes across all alternatives in the set. While stated preference (SP) surveys solve such choice set problems, revealed preference (RP) surveys collect actual behavior and incorporate situational and personal constraints, which impact rare choice contexts (e.g., evacuations). Consequently, we designed an RP survey for RRM (and RUM) in an evacuation context, which we distributed from March to July 2018 to individuals impacted by the 2017 December Southern California Wildfires (n=226). While we hypothesized that RRM would outperform RUM for evacuation choices, this hypothesis was not supported by our data. We explain how this is partly the result of insufficient attribute-level variation across alternatives, which leads to difficulties in distinguishing non-linear regret from linear utility. We found weak regret aversion for some attributes, and we identified weak class-specific regret for route and mode choice through a mixed-decision rule latent class choice model, suggesting that RRM for evacuations may yet prove fruitful. We derive methodological implications beyond the present context toward other RP studies involving challenging choice sets and/or limited attribute variability. |
| Keywords: | Engineering, Evacuation Behavior, Regret Minimization, Revealed Preference, Discrete Choice Analysis, California Wildfires |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:itsrrp:qt2k12q9ph&r=all |
| By: | Antoine Bommier (ETH Zurich); Daniel Harenberg (ETH Zurich); François Le Grand (EMLyon Business School); Cormac O'Dea (Cowles Foundation, Yale University) |
| Abstract: | We analyze lifecycle saving strategies using a recursive utility model calibrated to match empirical estimates for the value of a statistical life. We show that, with a positive value of life, risk aversion reduces savings and annuity purchase. Risk averse agents are willing to make an early death a not-so-adverse outcome by enjoying greater consumption when young and bequeathing wealth in case of death. We also ï¬ nd that greater risk aversion lowers stock market participation. We show that this model can rationalize low annuity demand while also matching empirically documented levels of wealth and private investments in stocks. Our ï¬ ndings stand in contrast to studies that implicitly assume a negative value of life. |
| Keywords: | Recursive utility, Lifecycle model, Value of life, Risk aversion, Saving choices, Portfolio choices, Annuity puzzle |
| JEL: | D91 G11 J14 J17 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2231&r=all |
| By: | Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini |
| Abstract: | We provide two characterizations, one axiomatic and the other neuro-computational, of the dependence of choice probabilities on deadlines, within the widely used softmax representation \[ p_{t}\left( a,A\right) =\dfrac{e^{\frac{u\left( a\right) }{\lambda \left( t\right) }+\alpha \left( a\right) }}{\sum_{b\in A}e^{\frac{u\left( b\right) }{\lambda \left( t\right) }+\alpha \left( b\right) }}% \] where $p_{t}\left( a,A\right) $ is the probability that alternative $a$ is selected from the set $A$ of feasible alternatives if $t$ is the time available to decide, $\lambda$ is a time dependent noise parameter measuring the unit cost of information, $u$ is a time independent utility function, and $\alpha$ is an alternative-specific bias that determines the initial choice probabilities and possibly reflects prior information. Our axiomatic analysis provides a behavioral foundation of softmax (also known as Multinomial Logit Model when $\alpha$ is constant). Our neuro-computational derivation provides a biologically inspired algorithm that may explain the emergence of softmax in choice behavior. Jointly, the two approaches provide a thorough understanding of soft-maximization in terms of internal causes (neurophysiological mechanisms) and external effects (testable implications). |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.13376&r=all |
| By: | Lorenzo Bastianello; Jos\'e Heleno Faro; Ana Santos |
| Abstract: | A group of experts, for instance climate scientists, is to choose among two policies $f$ and $g$. Consider the following decision rule. If all experts agree that the expected utility of $f$ is higher than the expected utility of $g$, the unanimity rule applies, and $f$ is chosen. Otherwise the precautionary principle is implemented and the policy yielding the highest minimal expected utility is chosen. This decision rule may lead to time inconsistencies when an intermediate period of partial resolution of uncertainty is added. We provide axioms that enlarge the initial group of experts with veto power, which leads to a set of probabilistic beliefs that is "rectangular" in a minimal sense. This makes this decision rule dynamically consistent and provides, as a byproduct, a novel behavioral characterization of rectangularity. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.12347&r=all |
| By: | Hambulo Ngoma; Nicole M. Mason-Wardell; Paul C. Samboko; Peter Hangoma |
| Abstract: | Climate-smart agriculture (CSA) is an important component of policy options designed to sustainably increase agricultural productivity, build resilience to climate risks, and mitigate climate change in Sub-Saharan Africa. However, the uptake of common CSA practices such as conservation agriculture remains low and material constraint explanations (e.g., credit, market, labor, information) for this low uptake remain inadequate and unclear. Could behavioral traits or risk preferences play a role? We test the hypothesis that innate behavioral traits such as risk and time preferences play a role in CSA adoption and test whether adoption can be nudged using insurance and green subsidies. To do so, we use a series of incentivized field experiments with 323 randomly selected farmers in Zambia. We first conducted two games with each participant to elicit risk and time preference parameters. We then conducted three adoption games. In the first (base) game, participants decided whether to adopt CSA (conservation agriculture in this case) or conventional agriculture under various payoff scenarios. Returns to CSA and conventional agriculture varied depending on seasonal rainfall, and the realized seasonal rainfall was determined through a lottery (with a 25% chance of good rainfall) after participants had selected their preferred farming option (CSA or conventional agriculture). In the subsequent two games, we changed the payoff structures by augmenting CSA with rainfall insurance and a green subsidy, respectively. The green subsidy is an add-on incentive for farmers that adopt CSA. We compare adoption behavior under the base scenario to the CSA plus insurance scenario and the CSA plus subsidy scenario. We also use the elicited preference parameters from the time and risk preferences games to analyze their role in participants’ adoption decisions. Overall, we find that the majority of participants in our experiments are risk-averse and impatient, and that a larger proportion of women were more risk-averse and impatient than men. Risk aversion and impatience were negatively correlated with the likelihood of adopting CSA. Time and risk preferences were associated with the likelihood of switching adoption between the base and follow- on (augmented) games. For example, an increase in risk aversion increased the likelihood of switching from conservation agriculture in base games to conservation agriculture with insurance in follow-on games. Introducing insurance and green subsidies increased the level of adoption by 10 and 8 percentage points and the probability of adoption by approximately 6 – 12 percentage points. Whether these switch-up levels are high enough is an empirical question, but suggest that insurance and green subsidies are unlikely the panacea. Thus, although monetary returns matter in CSA adoption, non- pecuniary factors such as risk and time preferences also matter. These behavioral traits could partly explain the perceived low adoption of CSA practices such as conservation agriculture. Several factors including uninsured basis risk, trust in and how well farmers understand insurance and subsidy incentives, knowledge of the technology, and subjective perceptions of its riskiness influence adoption choices. Access to extension and subjective risk perceptions were stronger determinants of adoption in real life. Given our findings that more risk-averse individuals are less likely to adopt CSA, a practice that is intended to be risk-reducing, a key policy implication is the need for a retooling of both public and private extension services to better demonstrate and educate farmers on the risk-reducing effects of CSA practices such as conservation agriculture. Moreover, if insurance and subsidies are to be used successfully to nudge adoption, extension will need to educate farmers on the structure of and mechanisms for payouts. This is important to build trust in the incentive systems. |
| Keywords: | Food Security and Poverty, International Development |
| Date: | 2019–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:ags:miffrp:303524&r=all |
| By: | Antoine Billot (LEM - Laboratoire d'Économie Moderne - UP2 - Université Panthéon-Assas); Sujoy Mukerji (QMUL - Queen Mary University of London); Jean-Marc Tallon (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We review some of the (theoretical) economic implications of David Schmeidler's models of decision under uncertainty (Choquet expected utility and maxmin expected utility) in competitive market settings. We start with the portfolio inertia result of Dow and Werlang (1992), show how it does or does not generalize in an equilibrium setting. We further explore the equilibrium implications (indeterminacies, non revelation of information) of these decision models. A section is then devoted to the studies of Pareto optimal arrangements under these models. We conclude with a discussion of experimental evidence for these models that relate, in particular, to the implications for market behaviour discussed in the preceding sections. |
| Abstract: | Nous passons en revue les implications en termes d'allocation du risque des modèles de décision développés par David Schmeidler. Nous revenons sur le résultat d'inertie des portfeuilles de Dow et Werlang (1992) et discutons de l'extension du résultat dans un cadre d'équilibre. Nous procédons ensuite à une revue des propriétés d'équilibre (indétermination, non révélation d'information) liées à ces modèles. Nous exposons ensuite les propriétés d'optimalité et concluons avec une discussion de la littérature expérimentale sur le sujet.. |
| Keywords: | Maxmin Expected Utility,No-trade,Risk Sharing,Indeterminacy,Experimental evidence,Choquet Expected Utility,Espérance d'utilité à la Choquet,Minimum d'espérances d'utilité,absence d'échanges,partage du risque,indétermination,expériences |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseptp:halshs-02495663&r=all |
| By: | Guilherme Dean Pelegrina (DSPCom - Laboratory of Signal Processing for Communications - UNICAMP - University of Campinas [Campinas], School of Electrical and Computer Engineering, University of Campinas, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne); Leonardo Tomazeli Duarte (School of Applied Sciences, University of Campinas); Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics); João Marcos Travassos Romano (UnB - University of Brasilia [Brazil]) |
| Abstract: | In several multicriteria decision making problems, it is important to consider interactions among criteria in order to satisfy the preference relations provided by the decision maker. This can be achieved by using aggregation functions based on fuzzy measures, such as the Choquet integral and the multilinear model. Although the Choquet integral has been studied in a large number of works, one does not find the same literature with respect to the multilinear model. In this context, the contribution of this work is twofold. We first provide a formulation of the multilinear model by means of a 2-additive capacity. A second contribution lies in the problem of capacity identification. We consider a supervised approach and apply optimization models with and without regularization terms. Results obtained in numerical experiments with both synthetic and real data attest the performance of the considered approaches. |
| Keywords: | capacity identification,2-additive capacity,multiple criteria analysis,multilinear model,multi-attribute utility theory |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseptp:halshs-02379646&r=all |
| By: | Abreu, Rafael Costa Berriel; Costa, Carlos Eugênio da |
| Abstract: | How is aggregate risks optimally shared between workers and retirees? We break this question in two parts. First, how ought risk to be shared between two groups of agents: one which must be provided incentives to make effort and other, which no longer be incentivized? Second, since incentives may be backloaded through pension entitlements, how does backloading optimally vary across states of nature? After formalizing these two aspects of the problem, we show that perfect risk sharing is optimal for log utility and when aggregate productivity growth is i.i.d.. For all other cases, departures from perfect risk sharing are welfare improving if more risk is born by retirees (resp. workers) when productivity growth is persistent (resp. mean reverting). Our numerical implementations however suggest that perfect risk sharing is approximately optimal for commonly used parameter values. |
| Date: | 2020–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:817&r=all |
| By: | Cullerne Bown, William |
| Abstract: | COVID-19 has left many governments facing questions of priority for which there is no obvious conceptual framework. When questions of politics, economics and health are so intertwined that one cannot be properly discussed without the others then neither political economy nor public health offer an adequate basis. Here I draw on principles of measurement to distil from epidemiology and economics the foundational concepts required in the current circumstances for governing. For governments determined to control their epidemic, I conclude they cannot avoid subordinating all other principles to a threshold of unhealthiness, and that these thresholds can be ordered. A corollary is a new and enduring uncertainty in all questions of policy. I illustrate different thresholds with examples from the United Kingdom, Hong Kong and New Zealand. |
| Keywords: | COVID-19, Political economy, Public health, Measurement, Utility function, Pandemic, Epidemic, Epidemiology, United Kingdom, Hong Kong, New Zealand |
| JEL: | C0 I1 |
| Date: | 2020–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99983&r=all |
| By: | Prati, Alberto (Aix-Marseille University); Senik, Claudia (Paris School of Economics) |
| Abstract: | Can people remember correctly their past well-being? We study three national surveys of the British, German and French population, where more than 50,000 European citizens were asked questions about their current and past life satisfaction. We uncover systematic biases in recalled subjective well- being: on average, people tend to overstate the improvement in their well-being over time and to understate their past happiness. But this aggregate figure hides a deep asymmetry: while happy people recall the evolution of their life to be better than it was, unhappy ones tend to exaggerate its worsening. It thus seems that feeling happy today implies feeling better than yesterday. These results offer an explanation of why happy people are more optimistic, perceive risks to be lower and are more open to new experiences. |
| Keywords: | memory biases, remembered utility, life satisfaction, intra-personal comparisons |
| JEL: | I31 D91 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13166&r=all |
| By: | Balaska, Dimitra; Pollalis, Yannis; Dimogerontas, George; Bitsori, Zoi; Karaferis, Dimitrios |
| Abstract: | AIM: The purpose of the present research study is to evaluate the quality of life of patients with musculoskeletal problems of the Spinal Column before and after surgery with the use of the EQ-5D-5L health status questionnaire. MATERIALS - METHODS: The research is based on primary data collection of 27 patients who completed the questionnaires at three different times: a) preoperatively; that is, after completion of conservative treatment which involved medication, physiotherapy, etc., b) ten days postoperatively and c) immediately after the first post-operative month. RESULTS: Out of the 27 patients, aged between 34 and 79 years (mean age 52±15,07) who participated in this study, 11 were males (40,7%) while 16 were females (59,3%). 48,1% of the patients suffered from a herniated intervertebral disc in the lumbar region, 18,5% from symptomatic degenerative disc disease (DDD or black disc), 18,5% from a herniated intervertebral disc in the cervical region and the remaining 14,8% from spondylolisthesis in the lumbar region. Total improvement of the quality of life (QoL) in our study was on average 0,6 QALYs at 10 days and 0,83 QALYs at 30 days. The total average direct cost of these surgical interventions amounted to 7413,1±3062,9 while the index of cost-utility for the sample population was estimated to be 12355,2 euro/ QALY at 10 days. This index decreased considerably to 8931,4 euro/ QALY at 30 days after the surgical intervention since the average benefit in QALYs increased and the QoL improved. CONCLUSIONS: The results of the present study point out the great utility of surgical interventions in the spinal column to treat patients’ common symptoms (low back pain with or without sciatica) with complications being nearly next to zero. By means of the EQ-5D-5L health status questionnaire, the comparative study of patients’ QoL both before and after surgical treatment reveals statistically considerable improvement at 10 and 30 days following the surgery. Finally, this study has led to useful conclusions: a) the modern technique of discoplasty is rather more efficient than percutaneous spinal fusion for the treatment of lumbago from degenerative disc disease in the lumbar region, b) conservative treatment of spinal column problems is rather less efficient than surgical treatment and c) modern surgery of the spinal column in Greece is rather more efficient than in other modern Health Systems. |
| Keywords: | Utility, Cost, Quality of Life, Spinal Column. |
| JEL: | I15 |
| Date: | 2020–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99886&r=all |
| By: | Pitters, Julia |
| Keywords: | Corona-crisis,social dilemma,justice perception,reactance,in-group bias,loss aversion |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iubhso:32020&r=all |
| By: | Fernando Leibovici; Ana Maria Santacreu |
| Abstract: | This paper studies the role of international trade of essential goods during a pandemic. We consider a multi-country multi-sector model with essential and non-essential goods. Essential goods provide utility relative to a reference consumption level, and a pandemic consists of an increase in this reference level. Each country produces domestic varieties of both types of goods using capital and labor subject to sectoral adjustment costs, and all varieties are traded internationally subject to trade barriers. We study the role of international trade of essential goods in mitigating or amplifying the impact of a pandemic. We find that the effects depend crucially on the countries' trade imbalances in essential goods. Net exporters can experience welfare gains during a pandemic, while net importers can be significantly hurt. The welfare losses of net importers are lower in a world with high trade barriers, while the reverse is the case for net exporters. Yet, once the pandemic arrives, net exporters of essential goods benefit from an increase in trade barriers, while net importers benefit from a decrease in them. These findings are consistent with preliminary evidence on changes in trade barriers across countries during the COVID-19 pandemic. |
| Keywords: | international trade; essential goods; pandemic; COVID-19; trade policy |
| JEL: | F1 F5 F6 F54 |
| Date: | 2020–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:87897&r=all |
| By: | James Njeru (Moi University) |
| Abstract: | Foreign aid represents an important source of finance in most countries in sub-Saharan Africa (SSA), where it supplements low savings, narrow export earnings and thin tax bases. In recent years the donor community has become more stringent about fiscal discipline and good policies, which has led to freezing of donor funds to governments that do not conform with aid conditionalities. The Kenyan government has experienced such aid cuts in the past and this paper uses a welfare utility maximization function to explore how government expenditure responds to fluctuations in aid flows. The empirical results indicate that the flow of foreign aid does influence government spending patterns. There is a positive and statistically significant relationship between the share of government expenditure in gross domestic product (GDP) and the share of net disbursement of overseas development assistance (ODA). While the study finds relatively little evidence that aid leads to tax relief, there are strong indications that the government renders aid fungible by financing recurrent expenditures. The effects of an aid freeze are strong in the short term as the Treasury embarks on stringent fiscal measures to counteract the negative effects. |
| URL: | http://d.repec.org/n?u=RePEc:aer:wpaper:135&r=all |
| By: | Fabrizio Cipollini; Giampiero M. Gallo; Alessandro Palandri |
| Abstract: | We build the time series of optimal realized portfolio weights from high-frequency data and we suggest a novel Dynamic Conditional Weights (DCW) model for their dynamics. DCW is benchmarked against popular model-based and model-free specifications in terms of weights forecasts and portfolio allocations. Next to portfolio variance, certainty equivalent and turnover, we introduce the break-even transaction costs as an additional measure that identifies the range of transaction costs for which one allocation is preferred to another. By comparing minimum-variance portfolios built on the components of the Dow Jones 30 Index, the proposed DCW overall attains the best allocations with respect to the measures considered, for any degree of risk-aversion, transaction costs and exposure. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.12400&r=all |
| By: | Bracke, Philippe; Tenreyro, Silvana |
| Abstract: | Using the universe of housing transactions in England and Wales in the last twenty years, we document a robust pattern of history dependence in housing mar- kets. Sale prices and selling probabilities today are affected by aggregate house prices prevailing in the period in which properties were previously bought. We investigate the causes of history dependence, with its quantitative implications for the post-crisis recovery of the housing market. To do so we complement our analysis with administrative data on mortgages and online house listings, which we match to actual sales. We find that high leverage in the pre-crisis period and anchoring (or reference dependence) both contributed to the collapse and slow recovery of the volume of housing transactions. We find no asymmetric effects of anchoring to previous prices on current transactions; in other words, loss aversion does not appear to play a role over and above simple anchoring. |
| Keywords: | Housing market; Fluctuations; down-payment effects; Reference dependence; Anchoring; Loss aversion |
| JEL: | N0 |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:103079&r=all |
| By: | Wang, Chih-Wei; Lopes Moreira Da Veiga, María Helena; Taamouti, Abderrahim; Ramos, Sofía B. |
| Abstract: | The Consumption-Capital Asset Pricing Model is a statement about the mean of asset returns anddoes not provide any information on the returns' quantiles. Using quantile maximization decisiontheory, this paper considers a quantile-based Euler equation that states that the asset price is afunction of the quantiles of the payoff, consumption growth, stochastic discount factor and riskaversion. Assuming that the consumption growth rate is log-elliptically distributed, we show thatreturns' quantiles are non-monotone functions of the consumption growth volatility. Using data fromthe United States and United Kingdom, empirical evidence validates our theoretical results and showsthat this volatility is a driving factor of the returns' distribution. |
| Keywords: | Stochastic Volatility; Quantile Utility Function; Quantile-Based Euler Equation; Consumption Volatility; Ccapm; Asset Pricing |
| JEL: | G12 C58 C21 |
| Date: | 2020–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:30332&r=all |