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on Utility Models and Prospect Theory |
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Issue of 2020‒11‒30
nine papers chosen by |
| By: | Géraldine Bocquého; Julien Jacob; Marielle Brunette |
| Abstract: | In the original specification of cumulative prospect theory, distinct sets of parameters control for the curvature of the value function and the shape of the probability weighting function. There is one for the gain domain and one for the loss domain. However, in most estimations, behaviour over losses is assumed to perfectly reflect behaviour over gains, through a unique set of parameters. We examine the consequences of relaxing this simplifying assumption in the context of Tanaka et al.’s (2010) risk-experiment procedure. On the one hand, we show that subjects’ behaviour for gains is mostly reflected for losses at the aggregate and individual levels, and is consistent with the cumulative prospect theory fourfold pattern. However reflection is partial as the mean curvature of the value function is slightly less convex for losses than it is concave for gains. These results are robust to a high-stake context. Then, we demonstrate that assuming reflection when measuring loss aversion is innocuous neither at the aggregate nor at the individual level. On the other hand, we highlight the existence of a strong, negative and persistent framing effect on values elicited for loss aversion. |
| Keywords: | risk preferences, Tanaka-Camerer-Nguyen method, probability weighting, loss aversion, reflected behaviour. |
| JEL: | C91 D81 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2020-44&r=all |
| By: | Harin, Alexander |
| Abstract: | The two main goals of the present article are: 1) To prove an existence theorem for forbidden zones for the expectations of real-valued random variables. 2) To define transformations (named here as auto-transformations) of the probability density functions (PDFs) of random variables into similar PDFs having smaller sizes of their domains and to outline their basic features. Such transformations can be used also for functions beyond the scope of the probability theory. The goals are caused by the well-known problems of behavioral sciences, e.g., by the underweighting of high and the overweighting of low probabilities, risk aversion, the Allais paradox, etc. |
| Keywords: | Expectations; Boundaries; Forbidden zones; Domains; Utility; |
| JEL: | C02 C1 C18 D8 D81 D84 |
| Date: | 2020–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104188&r=all |
| By: | Han Bleichrodt (Erasmus Research Institute of Management); Jurgen Eichberger (University of Heidelberg); Simon Grant (Australian National University); David Kelsey (University of Nottingham); Chen Li (Erasmus University, Rotterdam) |
| Abstract: | Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people’s preferences we tested them using a variation of Ellsberg’s three-color urn experiment. Subjects were asked to make a choice both before and after they received a signal. We found that most ambiguity neutral subjects satisfied both dynamic consistency and consequentialism and behaved consistent with subjective expected utility with Bayesian updating. The majority of ambiguity averse subjects violated at least one of the principles and they were more likely to satisfy consequentialism than dynamic consistency. |
| Keywords: | ambiguity, three-color Ellsberg paradox, consequentialism, dynamic consistency |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2020-17&r=all |
| By: | Gusarov, N.; Talebijmalabad, A.; Joly, I. |
| Abstract: | This work is a cross-disciplinary study of econometrics and machine learning (ML) models applied to consumer choice preference modelling. To bridge the interdisciplinary gap, a simulation and theorytesting framework is proposed. It incorporates all essential steps from hypothetical setting generation to the comparison of various performance metrics. The flexibility of the framework in theory-testing and models comparison over economics and statistical indicators is illustrated based on the work of Michaud, Llerena and Joly (2012). Two datasets are generated using the predefined utility functions simulating the presence of homogeneous and heterogeneous individual preferences for alternatives’ attributes. Then, three models issued from econometrics and ML disciplines are estimated and compared. The study demonstrates the proposed methodological approach’s efficiency, successfully capturing the differences between the models issued from different fields given the homogeneous or heterogeneous consumer preferences. |
| Keywords: | DISCRETE CHOICE MODELS;NEURAL NETWORK;PERFORMANCE COMPARISON;HETEREGENEOUS PREFERENCES |
| JEL: | C25 C45 C52 C80 C90 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2020-12&r=all |
| By: | Yao Thibaut Kpegli (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Brice Corgnet (Univ Lyon, Emlyon Business School, GATE UMR 5824, F-69130 Ecully, France); Adam Zylbersztejn (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | Eliciting all the components of prospect theory –curvature of the utility function, weighting function and loss aversion– remains an open empirical challenge. We develop a semi-parametric method that keeps the tractability of parametric methods while providing more precise estimates. Using the data of Tversky and Kahneman (1992), we revisit their main parametric results. We reject the convexity of the utility function in the loss domain, find lower probability weighting, and confirm loss aversion. We also report that the probability weighting function does not exhibit duality and equality across domains, in line with cumulative prospect theory and in contrast with original prospect and rank dependent utility theories. |
| Keywords: | Prospect theory, semi-parametric estimation, risk attitudes, weighting function, loss aversion |
| JEL: | D81 C91 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:2034&r=all |
| By: | Christoph Drobner (Technical University of Munich) |
| Abstract: | When do people update beliefs about ego-relevant information optimistically? Based on previous empirical and theoretical work, I postulate that optimistic belief updating is only activated when subjects expect no immediate resolution of uncertainty because subjects cannot savor direct belief utility from inflated beliefs when they anticipate the resolution of uncertainty. I test this hypothesis in a laboratory experiment, where subjects update beliefs about their relative performance in an IQ test, by manipulating subjects' expectations about uncertainty resolution. The results show that subjects in fact only engage in optimistic belief updating when they expect no immediate resolution of their true performance. This finding highlights an important dimension of the supply side of motivated beliefs and contributes to resolve the puzzling evidence on optimistic belief updating. Moreover, I document that subjects ex-post rationalize information by manipulating their stated beliefs about the ego-relevance of the IQ test depending on the valence of information. This result suggests an additional channel that subjects use to protect their ego utility, which goes beyond biases in information processing. |
| Keywords: | Motivated beliefs, Optimistic belief updating, Ex-post rationalization, Bayes' rule, Expectations about uncertainty resolution |
| JEL: | C91 D83 D84 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:aiw:wpaper:07&r=all |
| By: | Sui, Jin |
| Abstract: | Fiscal devaluation works as an alternative instrument to monetary de- valuation, helping countries to regain competitiveness in a monetary union. Focusing on a closed economy, this paper analyzes its effects in a dynamic framework. In the case of an increasing relative love for variety, fiscal de- valuation leads to a decrease in individual consumption, an increase in the number of firms and decreases in firm markups, which are pro-competitive effects in the short run. In the long run, steady states can exist in models using non-CES utility functions, for example, quadratic linear, Stone-Geary and CARA function. The increase in the consumption tax can attract more firms entering the market, which is supported by the innovation activities, and finally help the economy reach the social optimal status. |
| Keywords: | fiscal devaluation,relative love of variety,non-CES utility function |
| JEL: | H20 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224648&r=all |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_225v1&r=all |
| 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: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_225v2&r=all |