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on Utility Models and Prospect Theory |
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Issue of 2020‒10‒05
23 papers chosen by |
| By: | Hlouskova, Jaroslava (Institute for Advanced Studies (IHS), Vienna, International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria, and Faculty of National Economy, University of Economics in Bratislava, Slovakia); Tsigaris, Panagiotis (Department of Economics, Thompson Rivers University, Kamloops,BC, Canada) |
| Abstract: | Financial constraints or economic needs, career development, psychological satisfaction as well as demographic and situational factors cause workers to seek more than one job while enjoying leisure time. In this paper we examine how a worker with prospect theory type of preferences allocates her time between leisure, a safe job and a risky job. Optimal time allocation for a sufficient loss averse worker depends on the reference level which in turn determines whether the worker is willing to experience relative losses or not. When the reference level is relatively low then the sufficiently loss averse worker will allocate some of her time to leisure and will hold both jobs in order to diversify risk and reduce income loss arising from the risky job. However, if the probability of a good state of nature is very high and the reference level is very low, the worker spends time only on leisure and the risky job while avoids the safe job. Loss aversion does not affect the optimal time allocation to the three activities as the time allocation results in avoiding relative losses for any state of nature. When the reference level is relative high, but not too high, the worker will allocate her time between both safe and risky jobs as well as to the leisure. Worker with very high reference level will avoid the safe job and will divide her time between the risky job and the leisure. In both cases the worker is willing to accept relative losses in the bad state of nature provided it is compensated with relative gains in the good state of nature. Here the allocation of time to the three activities depends on the degree of loss aversion. When the reference level is relatively low, but not too low, an increase in the reference level will reduce leisure time, reduce time in the risky job and increase time in the safe job. At very low reference levels, an increase in the reference level will result in the worker re-allocating her time from leisure to the risky job assuming the probability of a good state of nature is higher than a threshold. When the reference level is high the opposite effects are observed. We also examine other comparative statics including the effect of changes in the wage rate. |
| Keywords: | multiple job holdings, prospect theory, loss aversion |
| JEL: | D81 G11 E24 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:23&r=all |
| By: | Diego Aycinena (Department of Economics, Universidad del Rosario; Economic Science Institute, Chapman University); Szabolcs Blazsek (Escuela de Negocios, Universidad Francisco Marroqu´ın); Lucas Rentschler (Department of Economics and Finance, Utah State University; lucas.rentschler@usu.edu); Charles Sprenger (California Institute of Technology; sprenger@caltech.edu) |
| Abstract: | Intertemporal choice experiments are increasingly implemented to make inference about discounting and marginal utility, yet little is known about the predictive power of resulting measures. This project links standard experimental choices to a decision on the desire to smooth a large-stakes payment — around 10% of annual income — through time. In a sample of around 400 Guatemalan Conditional Cash Transfer recipients, we find that preferences over large-stakes payment plans are closely predicted by experimental measures of patience and diminishing marginal utility. These represent the first findings in the literature on the predictive content of such experimentally elicited measures of discounting and marginal utility for a large-stakes decision. |
| Keywords: | Structural estimation, Out-of-sample prediction, Discounting, Convex Time Budget |
| JEL: | D1 D3 D90 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:20-36&r=all |
| By: | Michele Garagnani |
| Abstract: | This work reports an online experiment with a general-population sample examining the performance of budget-choice tasks for elicitation of risk attitudes. First, I compare the investment task of Gneezy and Potters (1997) with the standard choicelist method of Holt and Laury (2002), and evaluate their performance in terms of the number of correctly-predicted binary decisions in a set of out-of-sample lottery choices. There are no significant differences between the tasks in this sense, and performance is modest. Second, I included three additional budget-choice tasks (selection of a lottery from a linear budget set) where optimal decisions should have been corner solutions, and find that a large majority of participants provided interior solutions instead, casting doubts on subjects’ understanding of tasks of this type. |
| Keywords: | Risk preferences, elicitation methods, budget sets, portfolio Choices |
| JEL: | C91 D81 C83 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:362&r=all |
| By: | Rogna, Marco; Vogt, Carla |
| Abstract: | Obtaining significant levels of cooperation in public good and environmental games, under the assumption of players being purely selfish, is usually prevented by the problem of freeriding. Coalitions, in fact, generally fail to be internally stable and this cause a serious underprovision of the public good together with a significant welfare loss. The assumption of relational preferences, capable of better explaining economic behaviors in laboratory experiments, helps to foster cooperation, but, without opportune transfers scheme, no substantial improvements are reached. The present paper proposes an optimal transfers scheme under the assumption of players having Fehr and Schmidt (1999) utility functions, whose objective is to guarantee internal stability and to maximize the sum of utilities of coalition members. The transfers scheme is tested on a public good contribution game parameterized on the data provided by the RICE model and benchmarked with other popular transfers scheme in environmental economics. The proposed scheme outperforms its benchmarking counterparts in stabilizing coalitions and sensibly increases cooperation compared to the absence of transfers. Furthermore, for high but not extreme values of the parameter governing the intensity of dis-utility from disadvantageous inequality, it manages to support very large coalitions including three quarters of all players. |
| Keywords: | climate policy,coalitions,inequality aversion,RICE model,transfers scheme |
| JEL: | C72 D63 H41 Q54 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:865&r=all |
| By: | Huber, Christoph (University of Innsbruck); Rose, Julia |
| Abstract: | In situations where both the magnitude of gains and losses as well as the probability distribution over these realizations is uncertain, imprecision is an inherent feature of decision-making. While imprecision has been shown to affect individual valuations, many decisions are made in market settings with potentially different implications. We thus examine the impact of imprecision, first, in an individual decision task, and second, in experimental asset markets—with no imprecision (risk), imprecision in probabilities (ambiguity), imprecision in outcomes, and full imprecision. We find imprecision seeking in outcomes in people’s individual attitudes, but these preferences do not withstand market dynamics. Nevertheless, we observe imprecision aversion in probabilities at the end of trading, suggesting that ambiguity aversion, in contrast, prevails in experimental markets. |
| Date: | 2020–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:bw8fc&r=all |
| By: | Sergei Mikhalishchev |
| Abstract: | This paper studies a welfare maximization problem with heterogeneous agents. A social planner designs a menu of choices for agents who misperceive either the properties of options or their own preferences. When agents misperceive the true properties of alternatives, it is optimal to limit a menu when the probability of a mistaken choice is moderately high. Additionally, it could be optimal to construct the menu with more distinct alternatives. However, when agents misperceive their own tastes, it is optimal to limit choice only when agents choose randomly, and to propose alternatives that are more similar when there is a greater probability of agents making a mistake. |
| Keywords: | discrete choice; optimal menu; bounded rationality; welfare analyses; |
| JEL: | D30 D60 D81 H80 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp670&r=all |
| By: | Mayrhofer, Thomas; Schmitz, Hendrik |
| Abstract: | Theoretical papers show that optimal prevention decisions in the sense of selfprotection (i.e., primary prevention) depend not only on the level of (second-order) risk aversion but also on higher-order risk preferences such as prudence (third-order risk aversion). We study empirically whether these theoretical results hold and whether prudent individuals show less preventive (self-protection) effort than non-prudent individuals. We use a unique dataset that combines data on higher-order risk preferences and various measures of observed real-world prevention behavior. We find that prudent individuals indeed invest less in self-protection as measured by influenza vaccination. This result is driven by high risk individuals such as individuals >60 years of age or chronically ill. We do not find a clear empirical relationship between riskpreferences and prevention in the sense of self-insurance (i.e. secondary prevention). Neither risk aversion nor prudence is related to cancer screenings such as mammograms, Pap smears or X-rays of the lung. |
| Keywords: | prudence,risk preferences,prevention,vaccination,screening |
| JEL: | D12 D81 I12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:863&r=all |
| By: | Xiaohong Chen (Yale University); Lars Peter Hansen (University of Chicago); Peter G. Hansen (Massachusetts Institute of Technology - Sloan School of Management) |
| Abstract: | This paper develops a new method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential belief distortions bounded by a statistical measure of discrepancy. Additionally, our method allows for the direct use of sparse survey evidence to make these bounds more informative. Within our framework, market-implied beliefs may differ from those implied by rational expectations due to behavioral/psychological biases of investors, ambiguity aversion, or omitted permanent components to valuation. Formally, we represent evidence about investor beliefs using a novel nonlinear expectation function deduced using model-implied moment conditions and bounds on statistical divergence. We illustrate our method with a prototypical example from macro-finance using asset market data to infer belief restrictions for macroeconomic growth rates. |
| Keywords: | Asset pricing, subjective beliefs, long-term uncertainty, ambiguity aversion, Cressie-Read divergence, generalized empirical likelihood, large deviation theory |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-69&r=all |
| By: | Fausto Panunzi; Nicola Pavoni; Guido Tabellini |
| Abstract: | This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters bcome risk lovers, and hence are intrinsically attracted by the more risky candidate. We show that, after a large adverse economic shock, the equilibrium can display policy divergence: the more risky candidate proposes lower taxes and is supported by a coalition of very rich and very disappointed voters, while the safe candidate proposes higher taxes. This can explain why new populist parties are often supported by economically dissatisfied voters and yet they run on economic policy platforms of low redistribution. We show that survey data on the German SOEP are consistent with our theoretical predicions on voters' behavior. |
| Keywords: | international taxation, multinational firms, financial statement income, book-tax conformity |
| JEL: | H25 M41 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8539&r=all |
| By: | Emmanuelle Augeraud-Véron (GREThA, Université de Bordeaux, France); Giorgio Fabbri (Univ. Grenoble Alpes, CNRS, INRAE, Grenoble INP, GAEL, Grenoble, France.); Katheline Schubert (Paris School of Economics, Université Paris 1 PanthéonSorbonne, France.) |
| Abstract: | The relation between biodiversity loss and frequency/probability of zoonose pandemic risk is now well documented in the literature. In this article we present a first model to integrate this phenomenon in the context of a general equilibrium dynamic economic set-up. The occurrence of pandemic episodes is modeled as Poissonian leaps in stochastic economic variables. The planner can intervene in the economic and epidemiological dynamics in two ways: first (prevention), by deciding to preserve a greater quantity of biodiversity, thus decreasing the probability of a pandemic occurring, and second (mitigation), by reducing the death toll through a partial blockage of economic activity. The class of social welfare functional considered has, as polar cases, a total utilitarian and an average utilitarian specifications. It implicitly considers, at the same time, the effects of policies on mortality and on the productive capacity of the country. Thanks to the Epstein-Zin specification of preferences, we can distinguish between risk aversion and fluctuation aversion. The model is explicitly solved and the optimal policy completely described. The qualitative dependence of the optimal intervention as a function of natural, productivity and preference parameters is discussed. In particular the optimal lockdown is shown to be more severe in societies valuing more human life, and the optimal biodiversity conservation is shown to be more relevant for more “forward looking” societies, with a small discount rate and a high degree of altruism towards individuals of future generations. We also show that societies accepting a large welfare loss to mitigate the pandemics are also societies doing a lot of prevention, not to have to incur the loss too often. After calibrating the model with COVID-19 pandemic data we compare the mitigation efforts predicted by the model with those of the recent literature and we study the optimal prevention-mitigation policy mix. |
| Keywords: | Biodiversity, COVID-19, prevention, mitigation, epidemics, Poisson processes, recursive preferences. |
| JEL: | Q56 Q57 Q58 O13 C61 |
| Date: | 2020–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2020026&r=all |
| By: | Salazar-Saenz,Mauricio; Robayo,Monica |
| Abstract: | This paper constructs and estimates a household-level search model to analyze Roma spouses'utility maximization for leisure, home production, and work. The paper aims to explain labor market gender gaps in a marginalized Roma population with low labor market participation rates (males 53 percent and females 17 percent). The analysis uses data from the 2017 Regional Roma Survey for six Western Balkan countries. The simulation results show that the main source for gender differentials in the labor market is the unequal opportunities in favor of males -- not gender preferences or differences in home production productivity. Therefore, most of the gender differences in the labor market can be closed by providing wives the same labor market conditions as husbands. Counterfactual policy experiments show that policies that increase the frequency of receiving a job offer, decrease the frequency of laying off workers, and reduce search increase Roma husbands'labor participation. Policies that equalize wages induces more wives to join the labor market and husbands to withdraw from it. This outcome signals that the wage gap is the dimension that deters the greatest number of Roma wives from joining the labor market. |
| Keywords: | Rural Labor Markets,Gender and Development,Employment and Unemployment,Inequality,Labor Markets |
| Date: | 2020–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9398&r=all |
| By: | Jason Shachat (Durham University Business School; Economics and Management School, Wuhan University); Matthew J. Walker (Durham University Business School); Lijia Wei (Economics and Management School, Wuhan University) |
| Abstract: | We examine how the emergence of Covid-19 in Wuhan, and the ramifications of associated events, influence pro-sociality, trust and attitudes towards risk and ambiguity. We assess these influences using an experiment consisting of financially incentivized economic tasks. We establish causality via the comparison of a baseline sample collected pre-epidemic with five sampling waves starting from the imposition of a stringent lock- down in Wuhan and completed six weeks later. We find significant long-term increases - measured as the difference between the baseline and final wave average responses - in altruism, cooperation, trust and risk tolerance. Participants who remained in Wuhan during the lockdown exhibit lower trust and cooperation relative to other participants. We identify transitory effects from two events that permeated the public psyche. First, in the immediate aftermath of the Wuhan lockdown, there is a decrease in trust and an increase in ambiguity aversion. Second, the news of a high-profile whistleblower's death also decreases trust while heightening risk aversion. |
| Keywords: | Covid-19, Social Preferences, Cooperation, Trust, Risk Preferences |
| JEL: | C93 D64 D81 D91 I18 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:20-33&r=all |
| By: | Christos Papadimitriou; Kiran Vodrahalli; Mihalis Yannakakis |
| Abstract: | On-line firms deploy suites of software platforms, where each platform is designed to interact with users during a certain activity, such as browsing, chatting, socializing, emailing, driving, etc. The economic and incentive structure of this exchange, as well as its algorithmic nature, have not been explored to our knowledge; we initiate their study in this paper. We model this interaction as a Stackelberg game between a Designer and one or more Agents. We model an Agent as a Markov chain whose states are activities; we assume that the Agent's utility is a linear function of the steady-state distribution of this chain. The Designer may design a platform for each of these activities/states; if a platform is adopted by the Agent, the transition probabilities of the Markov chain are affected, and so is the objective of the Agent. The Designer's utility is a linear function of the steady state probabilities of the accessible states (that is, the ones for which the platform has been adopted), minus the development cost of the platforms. The underlying optimization problem of the Agent -- that is, how to choose the states for which to adopt the platform -- is an MDP. If this MDP has a simple yet plausible structure (the transition probabilities from one state to another only depend on the target state and the recurrent probability of the current state) the Agent's problem can be solved by a greedy algorithm. The Designer's optimization problem (designing a custom suite for the Agent so as to optimize, through the Agent's optimum reaction, the Designer's revenue), while NP-hard, has an FPTAS. These results generalize, under mild additional assumptions, from a single Agent to a distribution of Agents with finite support. The Designer's optimization problem has abysmal "price of robustness", suggesting that learning the parameters of the problem is crucial for the Designer. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2009.06117&r=all |
| By: | Majid M. Al-Sadoon |
| Abstract: | This paper proposes computational methods for regularized solutions to linear rational expectations models. The algorithm allows for regularization cross-sectionally as well as across frequencies. The algorithm is illustrated by a variety of examples. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2009.05875&r=all |
| By: | Laine, Olli-Matti |
| Abstract: | This paper estimates the effect of the European Central Banks’s monetary policy on the term structure of expected stock market risk premia. Expected stock market premia are solved using analysts’ dividend forecasts, the Eurostoxx 50 stock index and Eurostoxx 50 dividend futures. Although risk-free rates have decreased after the global financial crisis, the results indicate that the expected average stock market return has remained quite stable at around 9 percent. This implies that the expected average stock market risk premium has increased since the financial crisis. The effect of monetary policy on expected premia is analysed using VAR models and local projection methods. According to the results, monetary policy easing raises the average expected premium. The effect is explained by a rise in long-horizon expected premia. |
| JEL: | E52 G12 |
| Date: | 2020–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2020_016&r=all |
| By: | Lambrecht, Marco |
| Abstract: | When Luce (1959) introduced his Choice Axiom, this raised immediate criticism by Debreu (1960), pointing out inconsistencies when items are ranked from inferior to superior (instead of ranking them from superior to inferior). As recently shown by Breitmoser (2019), Luce’s Independence of Irrelevant Alternatives (IIA) is equivalent to Luce’s Choice Axiom when positivity holds. This fact seems to have escaped attention so far and might suggest that Debreu’s critique also applies to the notion of IIA, which is widely used in the literature. Furthermore, this notion could potentially be intuitively misleading, as the consequences of this axiom seem to be different than the name suggests. This might spill over to the intuitive interpretation of theoretical results that build on this axiom. This paper motivates the introduction of the notion of Independece of Alternatives (IoA) in the context of ranking models. IoA postulates a property of independence which seems intuitively reasonable (as it exactly captures what Luce himself describes when speaking about IIA), but does not exclusively hold in models where Luce’s Choice Axiom applies. Assuming IoA, expected ranks in the ranking of multiple alternatives can be determined from pairwise comparisons. The result holds in many models which do not satisfy IIA (e.g. certain Thurstone V models, Thurstone (1927)), can significantly simplify the calculation of expected ranks in practice and potentially facilitate analytic methods that build on more general approaches to model the ranking of multiple alternatives. |
| Keywords: | Ranking models; IIA; IoA; Luce’s Choice Axiom; Thurstone V |
| Date: | 2020–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0688&r=all |
| By: | Sebastian O. Schneider; Matthias Sutter |
| Abstract: | We use a novel method to elicit and measure higher order risk preferences (prudence and temperance) in an experiment with 658 adolescents. In line with theoretical predictions, we find that higher order risk preferences particularly prudence are strongly related to adolescents' field behavior, including their financial decision making, eco-friendly behavior, and health status, including addictive behavior. Most importantly, we show that dropping prudence and temperance from the analysis of students' field behavior would yield largely misleading conclusions about the relation of risk aversion to these domains of field behavior. Thus our paper puts previous work that ignored higher order risk preferences into an encompassing perspective and clarifies which orders of risk preferences can help understand field behavior of adolescents. |
| Keywords: | higher order risk preferences, prudence, temperance, risk aversion, field behavior, adolescents, health, addictive behavior, smartphone addiction, experiment |
| JEL: | C93 D81 D91 J13 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8544&r=all |
| By: | YiLi Chien; In-Koo Cho; B. Ravikumar |
| Abstract: | This paper illustrates a challenge in analyzing the learning algorithms resulting in second-order difference equations. We show in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. We then show that to guarantee convergence, the gain parameter used in the learning rule has to be restricted based on economic fundamentals in the monetary model. |
| Keywords: | rational expectations equilibrium; learning algorithm; convergence; gain function |
| JEL: | C60 D84 |
| Date: | 2020–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:88664&r=all |
| By: | Batabyal, Amitrajeet; Beladi, Hamid |
| Abstract: | We study pollution cleanup in the Ganges in Varanasi, India. Voters elect politicians and elected politicians decide how much pollution to clean up. Between the two time periods, there is an election. Politicians are sincere or insincere. The marginal cost of public funds ζ measures how efficiently elected politicians transform tax receipts into pollution cleanup. Voters have identical per period utility functions. We ascertain the equilibrium outcome and per period voter welfare. Second, we show that an increase in ζ reduces the equilibrium pollution cleanup and voter welfare. Third, an insincere politician can delay the revelation of his insincerity. We show that a critical value of ζ,ζ^*, exists such that the insincere incumbent separates and loses the election if and only if ζ>ζ^* and that he pools and is re-elected otherwise. Finally, we note that an increase in ζ can raise voter welfare when politicians are more likely to be insincere. |
| Keywords: | Ganges River, Politician, Pollution Cleanup, Uncertainty, Voting |
| JEL: | D72 Q52 |
| Date: | 2020–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102790&r=all |
| By: | Meinhardt, Holger Ingmar |
| Abstract: | Based on results discussed by Meinhardt (2013), which presents a dual characterization of the prekernel by a finite union of solution sets of a family of quadratic and convex objective functions, we could derive some results related to the single-valuedness of the pre-kernel. Rather than extending the knowledge of game classes for which the pre-kernel consists of a single point, we apply a different approach. We select a game from an arbitrary game class with a single pre-kernel element satisfying the non-empty interior condition of a payoff equivalence class, and then establish that the set of related and linear independent games which are derived from this pre-kernel point of the default game replicates this point also as its sole pre-kernel element. Hence, a bargaining outcome related to this pre-kernel element is stable. Furthermore, we establish that on the restricted subset on the game space that is constituted by the convex hull of the default and the set of related games, the pre-kernel correspondence is single-valued, and therefore continuous. In addition, we provide sufficient conditions that preserve the pre-nucleolus property for related games even when the default game has not a single pre-kernel point. Finally, we apply the same techniques to related solutions of the pre-kernel, namely the modiclus and anti-pre-kernel, to work out replication results for them. |
| Keywords: | Transferable Utility Game, Pre-Kernel, Pre-Nucleolus, Anti-Pre-Nucleolus, Modiclus, Uniqueness of the Pre-Kernel, Convex Analysis, Fenchel-Moreau Conjugation, Indirect Function, Stability Analysis. |
| JEL: | C71 |
| Date: | 2020–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102676&r=all |
| By: | Diego Zabaljauregui |
| Abstract: | The topics treated in this thesis are inherently two-fold. The first part considers the problem of a market maker optimally setting bid/ask quotes over a finite time horizon, to maximize her expected utility. The intensities of the orders she receives depend not only on the spreads she quotes, but also on unobservable factors modelled by a hidden Markov chain. This stochastic control problem under partial information is solved by means of stochastic filtering, control and PDMPs theory. The value function is characterized as the unique continuous viscosity solution of its dynamic programming equation and numerically compared with its full information counterpart. The optimal full information spreads are shown to be biased when the exact market regime is unknown, as the market maker needs to adjust for additional regime uncertainty in terms of PnL sensitivity and observable order flow volatility. The second part deals with numerically solving nonzero-sum stochastic impulse control games. These offer a realistic and far-reaching modelling framework, but the difficulty in solving such problems has hindered their proliferation. A policy-iteration-type solver is proposed to solve an underlying system of quasi-variational inequalities, and it is validated numerically with reassuring results. Eventually, the focus is put on games with a symmetric structure and an improved algorithm is put forward. A rigorous convergence analysis is undertaken with natural assumptions on the players strategies, which admit graph-theoretic interpretations in the context of weakly chained diagonally dominant matrices. The algorithm is used to compute with high precision equilibrium payoffs and Nash equilibria of otherwise too challenging problems, and even some for which results go beyond the scope of the currently available theory. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2009.06521&r=all |
| By: | Jakob, Martina; Combet, Benita |
| Abstract: | Previous research on educational aspirations and educational decision-making has mostly focused on high-income countries and thus on a relatively homogeneous socio-economic context. However, educational decision-making may be sensitive to contextual factors such as economic deprivation, a dysfunctional welfare state or poor access to credit markets – characteristics shared by most low- and middle-income countries. To better understand how economically disadvantaged individuals in developing countries make their educational choices, we conducted a survey based on a random sample with high school students in the rural department Morazán in El Salvador, a lower middle-income country in Latin America. Our results show that regardless of the social background, almost all students aspire to pursue tertiary education, probably due to the high tertiary degree premium in earnings and the high social benefits. However, the lack of possibilities to finance their studies generally prevents the realisation of these aspirations for lower social background students. While in high-income countries, cost factors are not very important in the decision-making process, the burden of costs explains around 45 percent of the social background effect in El Salvador. Other factors such as academic confidence, expected future economic benefits, parental status maintenance wish, individual risk aversion and time discounting preferences play only a minor role. |
| Date: | 2020–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:w9bkq&r=all |
| By: | Michael J. Campbell; Vernon L. Smith (Chapman University) |
| Abstract: | We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses of reward /punishment in the form of higher/lower payo transfers. There are two timescales: one for strictly self-interested action, as in economic equilibrium, and another governed by feelings of gratitude/resentment. One of three timescale scenarios is investigated: one where gratitude /resentment changes much more slowly than economic equilibrium (“quenched model†). Another model, in which economic equilibrium occurs over a much slower time than gratitude /resentment evolution (“annealed†model) is set up, but not investigated. The quenched model with homogeneous interactions turns out to be a non-frustrated spin-glass model. A twoagent quenched model with heterogeneous aligning (ferromagnetic) interactions is analyzed and yields new insights into the critical quenched probability p (1 􀀀 p) that represents the empirical frequency of opportunity for agent i to take action for the benefit (hurt) of other that invokes mutual gratitude (resentment). A critical quenched probability p i , i = 1; 2, exists for each agent. When p p i , agent i will take action sensitive to their interpersonal feelings of gratitude/resentment and thus reward/punish the initiating benefit/hurt. We find that the p i are greater than one-half, which implies agents are averse to resentful behavior and punishment. This was not built into the model, but is a result of its properties, and consistent with Axiom 4 in Humanomics about the asymmetry of gratitude and resentment. Furthermore, the agent who receives less payo is more averse to resentful behavior; i.e., has a higher critical quenched probability. For this particular model, the Nash equilibrium has no predictive power of Humanomics properties since the rewards are the same for self-interested behavior, resentful behavior, and gratitude behavior. Accordingly, we see that the boundedly rational Gibbs equilibrium does indeed lead to richer properties. |
| Keywords: | Agent Based Model, Bounded Rationality, Correlation Inequality, Humanomics, Phase Transition, Potential Game, Spin Glass |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:20-35&r=all |