nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2020‒11‒09
thirteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Dual-self Representations of Ambiguity Preferences By Madhav Chandrasekher; Mira Frick; Ryota Iijima; Yves Le Yaouanq
  2. Theory-based residual neural networks: A synergy of discrete choice models and deep neural networks By Shenhao Wang; Baichuan Mo; Jinhua Zhao
  3. Identifying Rule-Based Rationality By Yoram Halevy; Guy Mayraz
  4. Representing travel cost variation in large-scale models of long-distance passenger transport By Kristoffersson, Ida; Daly, Andrew; Algers, Staffan; Svalgård-Jarcem, Stehn
  5. Motivated Information Acquisition in Social Decisions By Si Chen; Carl Heese
  6. Impact of Consequence Information on Insurance Choice By Anya Samek; Justin R. Sydnor
  7. Imitation Perfection - a Simple Rule to Prevent Discrimination in Procurement By Nicolas Fugger; Vitali Gretschko; Helene Mass; Achim Wambach
  8. Age-Related Taxation of Bequests in the Presence of a Dependency Risk By Marie-Louise Leroux; Pierre Pestieau
  9. Debreu's open gap lemma for semiorders By A. Estevan
  10. Оценка эффективности доклинической диагностики болезни Паркинсона методом "затраты-полезность" By Denisova, Irina; Chubarova, Tatiana; Bogatova, Irina; Vartanov, Sergey; Kucheryanu, Valerian; Polterovich, Victor; Tourdyeva, Natalia; Shakleina, Marina
  11. Electric Street Car as a Clean Public Transport Alternative: A Choice Experiment Approach By Oindrila Dey; Debalina Chakravarty
  12. Populist politics and pandemics: some simple analytics By Murshed, S.M.
  13. COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis By Shinsuke Ikeda; Eiji Yamamura; Yoshiro Tsutsui

  1. By: Madhav Chandrasekher (Pinterest, Inc.); Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yves Le Yaouanq (Ludwig-Maximilians-Universität, Munich)
    Abstract: We propose a class of multiple-prior representations of preferences under ambiguity, where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DM’s ambiguity attitude, and we show that it provides a uni?ed framework through which to characterize di?erent degrees of ambiguity aversion, and to represent the co-existence of negative and positive ambiguity attitudes within individuals as documented in experiments. We prove that our baseline representation, dual-self expected utility (DSEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989). Extensions of DSEU allow for more general departures from independence.
    Keywords: Ambiguity, Multiple priors, Dual-self models
    JEL: D81
    Date: 2019–06
  2. By: Shenhao Wang; Baichuan Mo; Jinhua Zhao
    Abstract: Researchers often treat data-driven and theory-driven models as two disparate or even conflicting methods in travel behavior analysis. However, the two methods are highly complementary because data-driven methods are more predictive but less interpretable and robust, while theory-driven methods are more interpretable and robust but less predictive. Using their complementary nature, this study designs a theory-based residual neural network (TB-ResNet) framework, which synergizes discrete choice models (DCMs) and deep neural networks (DNNs) based on their shared utility interpretation. The TB-ResNet framework is simple, as it uses a ($\delta$, 1-$\delta$) weighting to take advantage of DCMs' simplicity and DNNs' richness, and to prevent underfitting from the DCMs and overfitting from the DNNs. This framework is also flexible: three instances of TB-ResNets are designed based on multinomial logit model (MNL-ResNets), prospect theory (PT-ResNets), and hyperbolic discounting (HD-ResNets), which are tested on three data sets. Compared to pure DCMs, the TB-ResNets provide greater prediction accuracy and reveal a richer set of behavioral mechanisms owing to the utility function augmented by the DNN component in the TB-ResNets. Compared to pure DNNs, the TB-ResNets can modestly improve prediction and significantly improve interpretation and robustness, because the DCM component in the TB-ResNets stabilizes the utility functions and input gradients. Overall, this study demonstrates that it is both feasible and desirable to synergize DCMs and DNNs by combining their utility specifications under a TB-ResNet framework. Although some limitations remain, this TB-ResNet framework is an important first step to create mutual benefits between DCMs and DNNs for travel behavior modeling, with joint improvement in prediction, interpretation, and robustness.
    Date: 2020–10
  3. By: Yoram Halevy; Guy Mayraz
    Abstract: The revealed preference methodology allows an observer to infer preferences from choices. This paper extends this fundamental idea by experimentally identifying the preference for basing choices on simple decision rules. Subjects not only make case-by-case portfolio allocations but also design a simple investment rule for selecting portfolios. They then choose between these two decision modes for an additional set of problems. The majority opt for the rule interface, and in most cases, choose a simple investment rule that cannot be rationalized by any simple utility function or accounted for by reductions in decision time or cognitive costs.
    Keywords: bounded rationality, procedural rationality
    JEL: C91 D01 D81 D91 G11
    Date: 2020–10–25
  4. By: Kristoffersson, Ida (Research Programme in Transport Economics); Daly, Andrew (University of Leeds); Algers, Staffan (TPMod); Svalgård-Jarcem, Stehn (WSP Advisory)
    Abstract: In this paper we show that travel cost variation for long-distance travel is often substantial, even within a given mode, and we discuss why it is likely to increase further in the future. Thus, the current praxis in large-scale models to set one single travel cost for a combination of origin, destination, mode, and purpose, has potential for improvement. To tackle this issue, we develop ways of accounting for cost variation in model estimation and forecasting. For public transport, two methods are developed, where the first method focuses on improving the average fare, whereas the second method incorporates a submodel for choice of fare alternative within a demand model structure. Only the second method is consistent with random utility theory. For car, cost variation is related to long run decisions such as car type choice and employment location. Handling car cost variation therefore implies considering car type choice and workplace choice rather than different options related to a specific trip. These long-term choices can be considered using a car fleet model.
    Keywords: Long-distance travel; Travel cost; Travel fare; Large-scale model; Demand model
    JEL: R40
    Date: 2020–10–28
  5. By: Si Chen; Carl Heese
    Abstract: Individuals can often inquire about how their decisions would affect others. When do they stop the inquiry if one of their options is preferred based on a selfish motive but is potentially in conflict with social motives? Using a laboratory experiment, we provide causal evidence that having a selfishly preferred option makes individuals more likely to continue the inquiry when the information received up to that point predominantly suggests that the selfish behavior harms others. In contrast, when the information received up to that point predominantly suggests that being selfish harms nobody, individuals are more likely to stop acquiring information. We propose a theoretical model drawing on the Bayesian persuasion model of (Kamenica and Gentzkow, 2011). The model shows that the information acquisition strategy documented in our experiment can be optimal for a Bayesian agent who values the belief of herself not harming others but attempts to persuade herself to behave self-interestedly. The model predicts that strategic information acquisition motivated by self-interest can reduce the decisions' resulting negative externalities and improve the welfare of the affected others. Our laboratory experiment indeed confirms this prediction.
    Keywords: Motivated Beliefs, Social Preferences, Information Preferences, Bayesian Persuasion, Belief Utility
    JEL: D90 D91
    Date: 2020–10
  6. By: Anya Samek; Justin R. Sydnor
    Abstract: Insurance choices are often hard to rationalize by standard theory and frequently appear sub-optimal. A key reason may be that people are unable to map the cost-sharing features of plans to their distribution of financial consequences. We develop and experimentally test a decision aid that provides this mapping to simplify comparisons of plan options. In two experiments mirroring typical health insurance decisions, we find that when people choose plans using standard feature-based information, they violate dominance at high rates. Our distribution-based decision aid substantially reduces dominance violations, and also changes choice patterns in situations where there is no dominant option. Choice patterns under feature-based menus can be most easily rationalized by models of heuristic choices, such as minimizing premium or deductible. With the decision aid, though, significantly more people have choice patterns that are better explained by expected utility theory. We compare our distribution-based approach to an alternative of providing estimates of the expected value of costs, which is the most common decision-support available in most insurance markets. Providing expected values affects choices in a similar direction as our consequence-based approach, but in a more muted fashion, and is only about half as effective at reducing dominance violations.
    JEL: D81 D83 G22 I13
    Date: 2020–10
  7. By: Nicolas Fugger; Vitali Gretschko; Helene Mass; Achim Wambach
    Abstract: Procurement regulation aimed at curbing discrimination requires equal treatment of sellers. However, Deb and Pai show that such regulation imposes virtually no restrictions on the ability to discriminate. We propose a simple rule - imitation perfection - that restricts discrimination significantly. It ensures that in every equilibrium bidders with the same valuation distribution and the same valuation earn the same expected utility. If all bidders are homogeneous, revenue and social surplus optimal auctions consistent with imitation perfection exist. For heterogeneous bidders, however, it is incompatible with revenue and social surplus optimization. Thus, a trade-off between non-discrimination and optimality exists.
    Keywords: Discrimination, symmetric auctions, procurement regulation
    JEL: D44 D73 D82 L13
    Date: 2020–10
  8. By: Marie-Louise Leroux; Pierre Pestieau
    Abstract: This paper studies the design of the optimal linear taxation of bequests when individuals differ in wage as well as in their risks of both mortality and old-age dependence. We assume that the government cannot distinguish between bequests motives, that is whether bequests resulted from precautionary reasons or from pure joy of giving reasons. Instead, we assume that it only observes the timing of bequests, that is whether they are made early in life or late in life. We show that, if the government is utilitarian, whether the taxation of early bequests should be given priority over the taxation of late bequests depends on the magnitude of insurance and redistributive concerns. While the efficiency concern unambiguously recommends taxation of early bequests, redistributive concerns yield ambiguous results. This indeterminacy comes from the fact that, in case of late death, the government cannot observe the health status of the deceased. Whether the taxation of early bequests should be given priority depends on the specific relationships between wages and both risks of early death and of old-age dependence, as well as on the concavity of the joy of giving utility function. If the government is Rawlsian, it is optimal to tax early bequests if the survival chances of the poorest agents are very low. If they survive, but their chances to remain autonomous are very low, it is then optimal to tax early bequests if the poorest agents contribute relatively less to the taxation of early bequests than to the taxation of late bequests or if the joy of giving utility is extremely concave.
    Keywords: bequest taxation, long term care, utilitarianism, Rawlsian welfare criterion, old-age dependency
    JEL: H21 H23 I14
    Date: 2020
  9. By: A. Estevan
    Abstract: The problem of finding a (continuous) utility function for a semiorder has been studied since in 1956 R.D. Luce introduced in \emph{Econometrica} the notion. There was almost no results on the continuity of the representation. A similar result to Debreu's Lemma, but for semiorders, was never achieved. Recently, some necessary conditions for the existence of a continuous representation as well as some conjectures were presented by A. Estevan. In the present paper we prove these conjectures, achieving the desired version of Debreu's Open Gap Lemma for bounded semiorders. This result allows to remove the open-closed and closed-open gaps of a subset $S\subseteq \mathbb{R}$, but now keeping the constant threshold, so that $x+1
    Date: 2020–10
  10. By: Denisova, Irina; Chubarova, Tatiana; Bogatova, Irina; Vartanov, Sergey; Kucheryanu, Valerian; Polterovich, Victor; Tourdyeva, Natalia; Shakleina, Marina
    Abstract: Neurodegenerative diseases, Parkinson disease being an example, set challenges to modern societies both in terms of premature deaths and resources spent on treatment of the diseases. Prevention and early diagnostics in particular, are potential directions towards higher economic efficiency of healthcare interventions in this area. We suggest a way to modify the cost-utility approach to evaluation of economic efficiency of an early diagnostics method of Parkinson disease (PD) at the laboratory stage of the diagnostics method. The lack of detailed understanding of the early testing group selection and composition are the major challenges to economic evaluation here. In particular, we consider the approach to diagnose PD at the prodromal stage suggested by Ugrumov 2020. The early diagnostics at the prodromal stage, accompanied by neuroprotective therapy of those identified at high risk of PD, allows postponing PD development for later years. The innovative approach implies saving both direct and indirect costs of PD treatment in comparison with traditional approach but adds costs of testing for the high risk of PD. The latter component may be non-trivial depending on the rules of selection into the group of tested. We suggest a way to modify the cost-utility evaluation procedure so that to take this uncertainty into account. We formulate the economic efficiency condition of the early diagnostics method in terms of the minimal probability of PD in the tested group and estimate the probability based on the Russian data. The latter sets the important threshold for innovative technology when moving from the laboratory into the clinical stage.
    Keywords: Economic efficiency in healthcare, Parkinson disease, early diagnostics, cost-utility approach
    JEL: H43 I18
    Date: 2020–10–20
  11. By: Oindrila Dey (Indian Institute of Foreign Trade (IIFT)); Debalina Chakravarty (Indian Institute of Management (IIM) Calcutta)
    Abstract: Electric Street Car (ESC) has established itself as an ideal public transport system for urban agglomeration by offering better safety, minimum pollution and conservation of fossil fuel. Yet, India envisions going all-electric by 2030 by procuring electric buses (e-buses) rather than ESCs. The crucial question is, why not upgrade the existing ESC considering that the e-buses need a profound infrastructural development in India. This paper studies the potential uptake rate of ESC over e-buses using stratified sampling data from 1226 daily public transport commuters of Kolkata, the only Indian city having an operational ESCs. We identify the demographic, psychometric and socio-economic factors influencing the probabilistic uptake of ESC over e-buses using a random utility choice model. It estimates that 38% of the commuters demand ESC over e-buses given the alternatives’ comparative details. ESC can be a model electric public transport if there is an improvement in factors, like frequent availability of ESCs and technological upgradation. By promoting the ESC services over e-buses, the government can potentially save on public investment and reach a low carbon pathway cost-effectively. The findings have crucial implications in exploration of the operational feasibility of ESC in the small and medium-sized cities of developing economies like India.
    Keywords: Public Transport, Electric Bus, Electric Street Car, Sustainability, Urban Area
    JEL: R58 R49 Q56 Q40
    Date: 2020–10
  12. By: Murshed, S.M.
    Abstract: This paper formally models the rise in populist politics during the last decade. In the literature the rise in populism is attributable both to cultural and economic factors. Chief among the latter is the inequality engendered by globalization and technical progress. When the plight of the marginalised is ignored by mainstream centrist parties, populist challengers rush in emphasizing cultural factors, invoking an enviable bygone past reminiscent of the golden age of capitalism. In what follows we apply prospect theory, where disenchanted individuals support populists because they promise to enact what is desirable, even at the expense of harming their already disadvantaged economic position. Support for populism depends upon the desirability of some of their nationalist policies to an already pre-disposed vote bank, as well as the calculus of meme verification. The model also incorporates political competition between a populist challenger and a liberal politician, where memes and messages are the strategic variables. It is postulated that nations ruled by populists are more likely to suffer more greatly from pandemic shocks, due to their public policies, except through serendipity or when the populist adopts more benevolent authoritarian practices.
    Keywords: populism, pandemics, inequality
    Date: 2020–10–22
  13. By: Shinsuke Ikeda; Eiji Yamamura; Yoshiro Tsutsui
    Abstract: Based on unique panel data from a five-wave internet survey in Japan, we show how the coronavirus disease 2019 pandemic affected people’s prospect-theory risk preferences, especially in the loss domain. The panel analysis indicates that with the spread of the pandemic, diminishing sensitivity becomes stronger for the participants’ value and probability weighting functions. Thus, due to the pandemic, (i) people become less sensitive to an increase in losses and feel less pain due to losses, especially large ones; and (ii) they become more pessimistic towards tail loss risks, and more optimistic towards non-tail loss risks. One implication is that people have become less cautious of the risks of suffering large non-tail losses, which might retard the recovery of society.
    Date: 2020–10

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