nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2020‒10‒12
eleven papers chosen by

  1. Risks and optimal migration duration: The role of higher order risk attitudes By Siwar Khelifa
  2. Perceived Uncertainty Shocks, Excess Optimism-Pessimism, and Learning in the Business Cycle By Pratiti Chatterjee; Fabio Milani
  3. Robust Inference in Risk Elicitation Tasks By Andersson, Ola; Holm, Håkan J.; Tyran, Jean-Robert; Wengström, Erik
  4. Reinsurance of multiple risks with generic dependence structures By Manuel Guerra; Alexandra B. Moura
  5. COVID-19 Pandemic and Economic Scenarios for Ontario By Miguel Casares; Paul Gomme; Hashmat Khan
  6. Cheap Talk with Multiple Experts and Uncertain Biases By Gülen Karakoç
  7. Dispersion estimation; Earnings risk; Censoring; Quantile regression; Occupational choice; Sorting; Risk preferences; SOEP; IABS By Daniel Pollmann; Thomas Dohmen; Franz Palm
  8. The gender gap in aversion to COVID-19 exposure: evidence from professional tennis By Piotr Lewandowski; Zuzanna Kowalik
  9. Gender differences in overconfidence and decision-making in high-stakes competitions: Evidence from freediving contests By Mario Lackner; Hendrik Sonnabend
  10. On measurement and continuity in neoclassical economics: The Pareto-Cassel controversy, 1899-1902 By Rogério Arthmar; Michael McLure
  11. Understanding Alcohol Consumption across Countries By Clements, Ken; Lan, Yihui; Liu, Haiyan

  1. By: Siwar Khelifa (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)
    Abstract: Using a bivariate expected utility framework, we develop a two-period model where households determine, in the presence of risks, the parents' migration duration when children are left behind. Our model suggests that the optimal migration duration may respond differently to an increase in a given risk. We provide conditions under which it is optimal for households to decrease the parents' migration duration despite an income risk in the place of origin, and to increase it even though the income in the place of destination is risky. The idea of preference for "harm disaggregation" is used to explain the results. In the absence of uncertainty, we also show the role of the interaction between child human capital and wealth in the household's utility function in determining the optimal migration duration of parents. Empirical implications of this analysis are presented in the last part of the paper.
    Keywords: Child human capital,Higher order risk attitudes,Labor migration,Nth degree Risk,Stochastic dominance
    Date: 2020
  2. By: Pratiti Chatterjee (School of Economics, University of New South Wales Business School); Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a finite-planning horizon, and they learn about the economy over time. Moreover, we allow agents to have a potentially asymmetric loss function in forecasting, which creates a direct channel for expected variances to affect the economy. In forming expectations, agents may be subject to shifts in optimism and pessimism (sentiment) and their beliefs may be influenced by their perceptions about future uncertainty. We estimate the behavioral model using Bayesian methods and exploit a large number of subjective expectation series (both point and density forecasts) at different horizons from the Survey of Professional Forecasters. We find that sentiment shocks are the key source of business cycle fluctuations. Shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel, as they play an important role in belief formation. Overall, the results shed light on the importance of behavioral forces over the business cycles, and on the contribution and interaction of first-moment - sentiment - shocks versus second-moment - perceived uncertainty - shocks.
    Keywords: Uncertainty Shocks; Sentiment; Animal Spirits; Learning; Behavioral New Keynesian Model; Sources of Business Cycle Fluctuations; Observed Survey Expectations; Optimism and Pessimism in Business Cycles; Probability Density Forecasts
    JEL: C32 E32 E50 E52
    Date: 2020–07
  3. By: Andersson, Ola (Department of Economics, Uppsala University); Holm, Håkan J. (Department of Economics, Lund University); Tyran, Jean-Robert (University of Vienna); Wengström, Erik (Department of Economics, Lund University, and)
    Abstract: Recent experimental evidence suggests that noisy behavior correlates strongly with personal characteristics. Since decision noise leads to bias in most elicitation tasks, there is a risk of falsely interpreting noise-driven relationships as preference driven. This puts previous studies that found a negative relation between personality measures and risk aversion into perspective and in particular raises the question of how to achieve robust inference in this domain. This paper shows, by way of an economic experiment with subjects from all walks of life, that using structural estimation that models heterogeneity of noise in combination with a balanced design allows us to mitigate the bias problem. Our estimations show that cognitive ability is related to noisy behavior rather than risk preferences. We also find age and education to be strongly related to noise, but the personality characteristics obtained using the Big Five inventory are less related to noise and more robustly correlated to risk preferences.
    Keywords: Risk preference; Cognitive ability; Experiment; Noise
    JEL: C81 C91 D12 D81
    Date: 2020–09–28
  4. By: Manuel Guerra; Alexandra B. Moura
    Abstract: We consider the optimal reinsurance problem from the point of view of a direct insurer owning several dependent risks, assuming a maximal expected utility criterion and independent negotiation of reinsurance for each risk. Without any particular hypothesis on the dependency structure, we show that optimal treaties exist in a class of independent randomized contracts. We derive optimality conditions and show that under mild assumptions the optimal contracts are of classical (non-randomized) type. A specific form of the optimality conditions applies in that case. We illustrate the results with some numerical examples.
    Date: 2020–09
  5. By: Miguel Casares (Departamento de Economia - UPNA); Paul Gomme; Hashmat Khan
    Abstract: We propose the merge of an epidemiological Susceptible-Infected-Recovered (SIR) model with a macroeconomic model based on the optimizing behavior of representative agents. In the integrated model, the virus contagion depends on the endogenously determined number of daily interpersonal contacts of individuals. These contacts may occur during both economic activities (consumption, working) and social activities. The rational behavior of households to determine consumption and work hours are affected by the virus spread because of a ‘fear of contagion’ term in their utility function. Social contacts are also included in the utility function in this case providing a positive marginal satisfaction. Other key features of the model are (i) a time-varying contagion probability to capture variations in public health preventative actions, (ii) asymptomatic virus transmission, (iii) a quarantine index capturing the scale of testing and effectiveness of surveillance (e.g., tracing and tracking, the speed of the process), (iv) telework, and (v) business shutdowns in response to the evolution of the contagion curve. The model parameters are calibrated to Ontario data and we present quantitative analyses of a variety of pandemic and economic scenarios relevant for policy makers.
    Date: 2020
  6. By: Gülen Karakoç
    Abstract: A decision maker solicits information from two partially informed experts and then makes a choice under uncertainty. The experts can be either moderately or extremely biased relative to the decision maker, which is their private information. I investigate the incentives of the experts to share their private information with the decision maker and analyze the resulting effects on information transmission. I show that it may be optimal to consult a single expert rather than two experts if the decision maker is sufficiently concerned about taking advice from extremely biased experts. In contrast to what may be expected, this result suggests that getting a second opinion may not always be helpful for decision making.
    Keywords: Cheap Talk, Multiple Experts, Asymmetric Information.
    JEL: C72 D82 D83
    Date: 2020–10
  7. By: Daniel Pollmann (Department of Economics, Harvard University); Thomas Dohmen (University of Bonn, Maastricht University, IZA, DIW and CESifo); Franz Palm (Maastricht University)
    Abstract: We present a semiparametric method to estimate group-level dispersion, which is particularly effective in the presence of censored data. We apply this procedure to obtain measures of occupation-specific wage dispersion using top-coded administrative wage data from the German IAB Employment Sample (IABS). We then relate these robust measures of earnings risk to the risk attitudes of individuals working in these occupations. We find that willingness to take risk is positively correlated with the wage dispersion of an individual's occupation.
    Keywords: Dispersion estimation; Earnings risk; Censoring; Quantile regression; Occupational choice; Sorting; Risk preferences; SOEP; IABS
    JEL: C14 C21 C24 J24 J31 D01 D81
    Date: 2020–09
  8. By: Piotr Lewandowski; Zuzanna Kowalik
    Abstract: We study the gender differences in aversion to COVID-19 exposure. We use a natural experiment of the 2020 US Open which was organised in the country with the highest number of COVID-19 cases and deaths and was the first major professional tennis tournament after the season was paused for six months. We analyse the gender gap in the propensity to voluntarily withdraw because of COVID-19 concerns among players who were eligible and fit to play. We find that female players are significantly more likely to withdraw from the 2020 US Open. While players from countries characterised by higher trust, higher patience, and lower risk taking are more likely to withdraw, female players exhibit significantly higher aversion to pandemic exposure also if cross-country differences in preferences are accounted for. About 15-20% of the probability to withdraw explained by our model can be attributed to gender.
    Keywords: COVID-19, exposure to disease, gender, aversion, tennis
    JEL: I12 J16 J44
    Date: 2020–09
  9. By: Mario Lackner; Hendrik Sonnabend
    Abstract: This study examines gender differences in overconfidence and decision-making in a high-stakes environment. Using data on more than 40,000 individual attempts from international freediving competitions, we provide evidence that women, on average, are less likely than men to overestimate their ability. This result is robust to different measures of overconfidence and can be partly explained by experience. There are no substantial gender differences on the intensive margin of overconfidence. In terms of performance, results suggest that women suffer more from overconfidence than men.
    Keywords: overconfidence; gender; decision-making; competition; freediving
    JEL: D03 D81 J16 Z2
    Date: 2020–09
  10. By: Rogério Arthmar (Department of Economics, UFES); Michael McLure (Economics Discipline, Business School, University of Western Australia)
    Abstract: This paper explores the controversy over the use of mathematics in economics happened between 1899 and 1902 involving Vilfredo Pareto, Gustav Cassel, Knut Wicksell, and Gaetano Scorza, with Maffeo Pantaleoni playing the role of intermediary. It begins by recapping the content of Pareto’s early articles and his book Cours d’Économie Politique (1896-97), where he lays out his method of successive approximations, the mutual interdependence of economic phenomena, and Leibniz’s principle of continuity. After that, Cassel’s criticism of formalization in economics is presented, as firstly set forth in his Grundrisse einer elementaren preislehre (1899) and further developed in later works. Cassel’s own simplified system of equations for determining prices through the concept of scarcity is introduced. The next section covers a set of unpublished letters between Pareto, Pantaleoni, and Cassel sitting at the National Library of Sweden. These documents reveal significant aspects of academic life in Europe at the time, as well as the correspondents’ interests on pure theory. The last section reviews the reception of Cassel’s Grundriss by Wicksell, Scorza, and Pareto. A few appointments on the history of mathematics are included to indicate how the rift among the mentioned economists echoed the influence of French and German traditions in infinitesimal analysis and algebra.
    Keywords: utility, measurement, continuity, scarcity, general equilibrium
    JEL: B13 B16 B31
    Date: 2020
  11. By: Clements, Ken; Lan, Yihui; Liu, Haiyan
    Abstract: Do drinkers respond to prices signals in the usual way by economising on beverages with higher prices and vice versa? Is the currency unit used in different countries irrelevant, or are drinkers subject to money illusion? Are the substitution effects of price changes symmetric? More fundamentally, can drinking patterns be adequately accounted for by the conventional utility-maximising approach? If so, how does consumption of beer, wine and spirits interact (if at all) in generating utility? According to the most recent data from the International Comparisons Program, on average, consumers in countries in the bottom quartile of the global income distribution devote something approaching one-half of all expenditures to food, while this falls to about 11% in the richest countries, in accordance with Engel’s law. The share for alcohol also drops, but much slower, so drinking rises noticeably relative to food as income increases. The within-alcohol distribution of spending (beer, wine and spirits) also changes quite dramatically. We use these cross-country data to address the above research questions. To visualise the data, we plot the budget shares for beer, wine and spirits in the form of a “drinking triangle”, which highlights the dominant beverage in each country. We also employ a Divisia-index-number approach to summarise the degree of price-quantity covariation. We cross-classify consumption and prices of beer, wine and spirits for nonparametric tests of the law of demand that higher prices lead to reduced consumption and vice versa. A system-wide model is estimated for the demand for beer, wine and spirits. As there is no unique way of ordering countries, a “levels version” of a differential system (similar to the Rotterdam model) is used. The system is used to test the hypotheses of homogeneity (the absence of money illusion) and symmetry of the substitution effects. For a substantial majority of countries, the Divisia price-quantity correlation is negative, which is suggestive evidence in favour of the economic approach to drinking. In the main, the results here support the law of demand. The hypotheses of homogeneity and symmetry cannot be rejected. Tests also reveal the coefficients are reasonable stable across countries, which sheds some light on the question of the similarity of tastes. Estimated price elasticities are tabulated for each beverage.
    Keywords: Food Consumption/Nutrition/Food Safety
    Date: 2020–09–16

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