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on Utility Models and Prospect Theory |
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Issue of 2020‒07‒20
eighteen papers chosen by |
| By: | Levy, Matthew; Schiraldi, Pasquale |
| Abstract: | We study the identification of intertemporal preferences in a stationary dynamic discrete decision model. We propose a new approach which focuses on problems which are intrinsically dynamic: either there is endogenous variation in the choice set, or preferences depend directly on the history. History dependence links the choices of the decision-maker across periods in a more fundamental sense standard dynamic discrete choice models typically assume. We consider both exponential discounting as well as the quasi-hyperbolic discounting models of time preferences. We show that if the utility function or the choice set depends on the current states as well as the past choices and/or states, then time preferences are non-parametrically point-identified separately from the utility function under mild conditions on the data and we may also recover the instantaneous utility function without imposing any normalization on the utility across states. |
| Keywords: | dynamic discrete choice; identification; quasi-hyperbolic discounting; Time preferences |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14447&r=all |
| 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 Classification: D63 ; D70 ; D90 ; Q54 ; Q56 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:55&r=all |
| By: | Ito, Shinsuke; Dejima, Takahisa |
| Abstract: | The availability of non-labor income (including asset income and labor income from other household members) can reduce individuals’ willingness to work. In general, when non-labor income increases, the demand for leisure increases due to the income effect, and as a result the supply of labor decreases. Ito and Dejima (2016) examined the influence of asset and rental income on employment (i.e. individuals’ choice to work) of youths in Japan using anonymized microdata from the National Survey of Family Income and Expenditure from the years of 1989, 1994, 1999, and 2004. However, this anonymized microdata does not contain detailed information on household assets, which limited the ability to perform an in-depth analysis of employment and household assets. Ito and Dejima (2017) examined the impact of residential area and real estate prices on employment using individual data from the 2009 National Survey of Family Income and Expenditure. Results suggested a theoretical possibility that higher ownership of household assets increases the likelihood that household members choose not to work. This research also found geographic differences in the impact of real asset ownership on employment. Recently, two models for household decision-making have received attention. The Unitary Model assumes that consumption decisions are made by the household unit and with the aim of maximizing overall household utility, whereas the Collective Model assumes that consumption decisions are made through negotiations between household members where each member seeks to maximize their own utility. The Unitary Model stipulates that households’ consumption decisions are not impacted by household members’ individual incomes, as it assumes that the household unit seeks to maximize overall household utility. On the other hand, the Collective Model suggests that household members with higher incomes have increased negotiation power and therefore greater influence on household consumption decisions. The Unitary Model has not been widely adopted as a model for household consumption behavior, while for the Collective Model no strong empirical relationship between household members' individual negotiating power and household consumption decisions has been identified. This research examines the relationship between household type and consumption behavior based on individual data from the National Survey of Family Income and Expenditure in order to evaluate whether the Unitary Model or Collective Model should be adopted as the model for household consumption behavior in Japan. The use of individual data allows analysis based on a broader range of household attributes including household members' employment, household members' individual incomes, and household size and structure, and therefore enables analysis into how household members’ incomes act as proxies of their negotiating power. |
| Keywords: | Collective Model, National Survey of Family Income and Expenditure, Household Type, Consumption Function |
| JEL: | D12 D13 E21 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:712&r=all |
| By: | Miguel Costa-Gomes; Georgios Gerasimou |
| Abstract: | Inertia and context-dependent choice effects are well-studied classes of behavioural phenomena. While much is known about these effects individually, little is known about whether one of them "dominates" another. Knowledge of any such dominance is important for effective choice architecture and for accurate descriptive modelling. We initiate this empirical investigation with a lab experiment on choice under risk that was designed to test for dominance between *status quo bias* and the *decoy effect*. We find that the former unambiguously prevails over the latter and is powerful enough to make the average subject switch from being risk averse to being risk-seeking. The observed reversal in risk attitudes is explainable by a large class of Kozsegi-Rabin (2006) reference-dependent preferences. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.14868&r=all |
| By: | Jagelka, Tomáš (University of Bonn) |
| Abstract: | This paper proposes a method for empirically mapping psychological personality traits to economic preferences. Careful modelling of random components of decision making is crucial to establishing the long supposed but empirically elusive link between economic and psychological systems for understanding differences in individuals' behavior. I use factor analysis to extract information on individuals' cognitive ability and personality and embed it within a Random Preference Model to estimate distributions of risk and time preferences, of their individual-level stability, and of people's propensity to make mistakes. I explain up to 50% of the variation in both average risk and time preferences and in individuals' capacity to make consistent rational choices using four factors related to cognitive ability and three of the Big Five personality traits. True differences in desired outcomes are related to differences in personality whereas actual mistakes in decisions are related to cognitive skill. |
| Keywords: | economic preferences, personality traits, decision error, measurement error, stochastic discrete choice |
| JEL: | D91 D80 D01 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13303&r=all |
| By: | Andrew Ellis; David J Freeman |
| Abstract: | In a decision problem comprised of multiple intermediate choices, subjects may fail to take into account the interdependencies between their choices. We design and deploy a novel experiment to understand how people make decisions in such problems. We provide revealed preference tests of three models of choice bracketing: broad, narrow, and partial-narrow. We apply these tests in three experiments to determine how subjects bracket in portfolio allocation under risk, social allocation, and induced-utility shopping experiments. 40-44\% of our subjects are consistent with narrow bracketing, while only 0-15\% are consistent with broad bracketing. Classifying subjects while adjusting for models' predictive precision, 75\% of subjects are best described by narrow bracketing, 14\% by broad bracketing, and 3\% by intermediate cases. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.14869&r=all |
| By: | Yuval Heller; Erik Mohlin |
| Abstract: | We develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterised by (i) a level of cognitive sophistication and (ii) a subjective utility function. Increased cognition is costly, but higher-level individuals have the advantage of being able to deceive lower-level opponents about their preferences and intentions in some of the matches. In the remaining matches, the individuals observe each other's preferences. Our main result shows that, essentially, only efficient outcomes can be stable. Moreover, under additional mild assumptions, we show that an efficient outcome is stable if and only if the gain from unilateral deviation is smaller than the effective cost of deception in the environment. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.15308&r=all |
| By: | Batabyal, Amitrajeet; Yoo, Seung Jick |
| Abstract: | Consider an aggregate economy of two cities. We study the impact that the use of utilitarian and Rawlsian policies by these two cities has on their ability to attract members of the so called creative class. We first focus on the case in which both cities adopt utilitarian policies. Second, we analyze the case where both cities implement Rawlsian policies. Third, we study the case where one city uses a Rawlsian policy but the other city pursues a utilitarian policy. Fourth, we compare the policy outcomes in the first and the third cases above and show that if one city switches to a Rawlsian or more egalitarian objective when the other city remains utilitarian, the aggregate economy becomes less egalitarian. Finally, we compare the second and the third cases above and demonstrate that if one city switches to a Rawlsian or more egalitarian objective when the other city remains Rawlsian, the aggregate economy becomes more egalitarian. |
| Keywords: | City, Creative Class, Egalitarian, Rawlsian, Utilitarian |
| JEL: | D63 R11 |
| Date: | 2020–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:101036&r=all |
| By: | Daniel Cardona (Universitat de les Illes Balears); Jenny De Freitas (Universitat de les Illes Balears); Antoni Rubí-Barceló (Universitat de les Illes Balears) |
| Abstract: | Lottery and share contests are equivalent for risk neutral contestants. We compare these two contests designs to show that this equivalence does no longer hold for risk averse contestants, in a policy contest setting. As expected, they prefer the share contest as it eliminates the uncertainty of the lottery. Under institutional settings in which contestants can pre-commit to policies different from their ideal one, the previous result is switched: Risk-averse contestants prefer lottery contests because, only under this design, they strategically moderate their claims, calming down the conflict and reducing the uncertainty of the lottery. Moreover, we show that contestants exert more effort in share contests. These results provide arguments justifying each of these two types of contests depending on the institutional framework and the comparative criteria. |
| Keywords: | lobbying; lottery contest; share contest; risk aversion; commitment; strategic restraint. |
| JEL: | C72 D72 D81 H40 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:93&r=all |
| By: | Arni, Patrick (University of Bristol); Dragone, Davide (University of Bologna); Götte, Lorenz (University of Bonn); Ziebarth, Nicolas R. (Cornell University) |
| Abstract: | This paper investigates the role of biased health perceptions as driving forces of risky health behavior. We define absolute and relative health perception biases, illustrate their measurement in surveys and provide evidence on their relevance. Next, we decompose the theoretical effect into its extensive and intensive margin: When the extensive margin dominates, people (wrongly) believe they are healthy enough to "afford" unhealthy behavior. Finally, using three population surveys, we provide robust empirical evidence that respondents who overestimate their health are less likely to exercise and sleep enough, but more likely to eat unhealthily and drink alcohol daily. |
| Keywords: | health bias, health perceptions, subjective beliefs, overconfidence, underconfidence, overoptimism, risky behavior, smoking, obesity, exercising, SF12, SAH, BASE-II |
| JEL: | C93 D03 D83 I12 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13308&r=all |
| By: | Fu Ouyang (School of Economics, University of Queensland); Thomas Tao Yang (Australian National University) |
| Abstract: | We propose new identi cation and estimation approaches to semiparametric discrete choice models for bundles in both cross-sectional and panel data settings. The random utility functions of these models take the usual parametric form, while no distributional assumption is imposed on the stochastic disturbances. Our proposed methods permit certain forms of heteroskedasticity and arbitrary correlation in the disturbances across choices. Our identi cation approach is matching-based; it matches observed covariates across agents for the cross-sectional case, and over time for the panel data case. For the cross-sectional model, we propose a kernel-weighted rank procedure and establish N-asymptotic normality of the resulting estimators. We show the validity of the nonparametric bootstrap for the inference. For the panel data model, we propose localized maximum score type estimators which have a non-standard asymptotic distribution. We show that the numerical bootstrap developed by Hong and Li (2020) is a valid inference method for our panel data estimators. Monte Carlo experiments demonstrate that our proposed estimation and inference procedures perform adequately in nite samples. |
| Keywords: | Bundle choices; rank estimation; panel data; bootstrap. |
| JEL: | C13 C14 C35 |
| Date: | 2020–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:625&r=all |
| By: | Francesco Bianchi; Sydney C. Ludvigson; Sai Ma |
| Abstract: | This paper combines a data rich environment with a machine learning algorithm to provide estimates of time-varying systematic expectational errors (“belief distortions”) about the macroeconomy embedded in survey responses. We find that such distortions are large on average even for professional forecasters, with all respondent-types over-weighting their own forecast relative to other information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by quantitatively large amounts. To investigate the dynamic relation of belief distortions with the macroeconomy, we construct indexes of aggregate (across surveys and respondents) expectational biases in survey forecasts. Over-optimism is associated with an increase in aggregate economic activity. Our estimates provide a benchmark to evaluate theories for which information capacity constraints, extrapolation, sentiments, ambiguity aversion, and other departures from full information rational expectations play a role in business cycles. |
| JEL: | E03 E17 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27406&r=all |
| By: | Joseph P. Byrne; Boulis M. Ibrahim; Xiaoyu Zong |
| Abstract: | An asset pricing model using long-run capital share growth risk has recently been found to successfully explain U.S. stock returns. Our paper adopts a recursive preference utility framework to derive an heterogeneous asset pricing model with capital share risks.While modeling capital share risks, we account for the elevated consumption volatility of high income stockholders. Capital risks have strong volatility effects in our recursive asset pricing model. Empirical evidence is presented in which capital share growth is also a source of risk for stock return volatility. We uncover contrasting unconditional and conditional asset pricing evidence for capital share risks. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.14023&r=all |
| By: | Saccal, Alessandro |
| Abstract: | Welfare maximisation is constrained by the ultimate frontier of efficient allocations, with a unique, interior optimum. By the second welfare theorem, such an optimum depends on a specific wealth distribution out of innumerable ones at given prices, whereby the state cannot refrain from redistributing. Such has long been known by the profession, but it never received a mathematical formalisation, which this article takes up. Building on the literature, this research also presents two simplified proofs to the two welfare theorems and a mathematical formalisation of the resolution to the compromise between equity and efficiency, for the additional constraint binds the social welfare function in equity and it originates the ultimate possibility frontier in efficiency. |
| Keywords: | competitive equilibrium; Pareto efficiency; political economy; social welfare; utility possibility; wealth distribution. |
| JEL: | D31 D51 D61 D63 I31 I38 P46 P48 |
| Date: | 2020–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:101037&r=all |
| By: | Castillo, Marco (Texas A&M University) |
| Abstract: | Using a longitudinal study of 1,900 Peruvian children, I show that children who grow up in a household where mothers report experiencing domestic violence are more risk averse and have lower cognitive development. Risk attitudes are measured with an incentivized experiment. The effect of domestic violence on risk attitudes is not mediated by cognitive development and suggests that early negative experiences in life can directly influence the risk attitudes of children. This experience is associated with other behavioral changes as well, including lower physical activity and higher BMI. |
| Keywords: | domestic violence, cognitive development, risk preferences, children |
| JEL: | C93 J13 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13320&r=all |
| By: | Theja Tulabandhula; Deeksha Sinha; Prasoon Patidar |
| Abstract: | We study the problem of modeling purchase of multiple items and utilizing it to display optimized recommendations, which is a central problem for online e-commerce platforms. Rich personalized modeling of users and fast computation of optimal products to display given these models can lead to significantly higher revenues and simultaneously enhance the end user experience. We present a parsimonious multi-purchase family of choice models called the BundleMVL-K family, and develop a binary search based iterative strategy that efficiently computes optimized recommendations for this model. This is one of the first attempts at operationalizing multi-purchase class of choice models. We characterize structural properties of the optimal solution, which allow one to decide if a product is part of the optimal assortment in constant time, reducing the size of the instance that needs to be solved computationally. We also establish the hardness of computing optimal recommendation sets. We show one of the first quantitative links between modeling multiple purchase behavior and revenue gains. The efficacy of our modeling and optimization techniques compared to competing solutions is shown using several real world datasets on multiple metrics such as model fitness, expected revenue gains and run-time reductions. The benefit of taking multiple purchases into account is observed to be $6-8\%$ in relative terms for the Ta Feng and UCI shopping datasets when compared to the MNL model for instances with $\sim 1500$ products. Additionally, across $8$ real world datasets, the test log-likelihood fits of our models are on average $17\%$ better in relative terms. The simplicity of our models and the iterative nature of our optimization technique allows practitioners meet stringent computational constraints while increasing their revenues in practical recommendation applications at scale. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.08055&r=all |
| By: | Sakamoto, Norihito |
| Abstract: | This paper characterizes new efficient and equitable social welfare orderings when individual well-beings are fully interpersonal comparable. Previous studies show that social welfare orderings satisfying the axioms of strong Pareto, anonymity, separability, and minimal equity are either weak utilitarian or leximin rules. By dropping the separability axiom, this study shows that there are various classes of distribution-sensitive social welfare orderings. In fact, simply imposing rank-separability instead of separability enables a class of social welfare orderings satisfying the axioms of strong Pareto, anonymity, and Pigou-Dalton transfer equity to be a generalized leximin rule (a general distribution-sensitive rule including leximin, rank-dependent utilitarianism, and their lexicographic compositions). This result is proved by a simple method that is intuitive and easy to understand without the need for advanced mathematical techniques, such as functional analysis and the hyperplane separation theorem, which are often used in typical social choice analyses. Following this new proof, the mechanism by which a class of reasonable social welfare orderings satisfying separability is limited to weak utilitarian and leximin rules can be easily understood and proved. This study also shows the impossibility theorem between the axioms of equity and continuity. Based on the results of previous studies and this paper, theoretical relationships between interpersonal comparability of individual well-being and equality axioms are clarified. That is, if the interpersonal comparability of well-being is a cardinal unit or ratio one, then Paretian and anonymous social welfare orderings are limited to Kolm-Pollack or Atkinson social welfare functions. If it is the ordinal level comparability, the desirable rule must be leximin. If it is the cardinal full comparability, the generalized leximin should be used. |
| Keywords: | Social Welfare Ordering, Joint Characterization, Generalized Leximin |
| JEL: | D71 D81 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rcnedp:7&r=all |
| By: | Dongshuang Hou (NPU - Northwestern Polytechnical University [Xi'an]); Aymeric Lardon (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Hao Sun (NPU - Northwestern Polytechnical University [Xi'an]) |
| Abstract: | Two new notions of stability of coalitions, based on the idea of exclusion or integration of players depending on how they affect allocations, are introduced for cooperative transferable utility games. The first one, called internal stability, requires that no coalition member would find that her departure from the coalition would improve her allocation or those of all her partners. The second one, called external stability, requires that coalitions members do not wish to recruit a new partner willing to join the coalition, since her arrival would hurt some of them. As an application of these two notions, we study the stability of Group Purchasing Organizations using the Shapley value to allocate costs between buyers. Our main results suggest that, when all buyers are initially alone, while small buyers will form internally and externally stable Group Purchasing Organizations to benefit from the best price discount, big buyers will be mutually exclusive and may cooperate with only small buyers. |
| Keywords: | Internal and external stability,Group purchasing organization,Cost allocation,Shapley value |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02860639&r=all |