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on Utility Models and Prospect Theory |
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Issue of 2021‒01‒11
eighteen papers chosen by |
| By: | Breuer, Wolfgang (RWTH Aachen University, Department of Finance, Aachen, Germany); Soypak, Can K. (RWTH Aachen University, Department of Finance, Aachen, Germany); Steininger, Bertram (Department of Real Estate and Construction Management, Royal Institute of Technology) |
| Abstract: | We present and expand existing theories about why individuals may assess positive outcomes differently from negative outcomes in intertemporal choices. All of our theories – based on utility or cost considerations – predict a conventional magnitude effect for positive outcomes, i.e., a negative relation between outcome size and subjective discount rates. For negative outcomes, however, implications are different for utility- and cost-based approaches. We argue that the relevance of utility-based aspects is strengthened in a money frame, leading to a conventional magnitude effect even for negative outcomes, whereas cost-based considera¬tions gain in importance in an interest rate frame, implying, in contrast, a “reverse” magnitude effect, i.e. higher discount rates for (absolutely) higher outcome size. By conducting a web-based experiment with 676 participants, we confirm our theoretical findings and conclude: the conventional magnitude effect prevails for positive outcomes in the money and the interest rate frame and for negative outcomes in the money frame. However, there is a reverse magnitude effect for negative outcomes in the interest rate frame. Our results might help to better understand prevailing magnitude effects in practical applications and might also be apt to derive suggestions for better designing of intertemporal decision problems. |
| Keywords: | Discounting anomalies; Intertemporal choice; Framing; Magnitude effect; Reverse magnitude effect |
| JEL: | D14 D90 D91 G02 G12 |
| Date: | 2020–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:kthrec:2020_016&r=all |
| By: | Yao Kpegli (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); Brice Corgnet (emlyon business school, 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); Adam Zylbersztejn (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: | 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 |
| Date: | 2020–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03016517&r=all |
| By: | Nikita Gusarov (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes); Amirreza Talebijamalabad (Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Iragaël Joly (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes) |
| 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 analysis,Performance comparison,Heterogeneous preferences |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03019739&r=all |
| By: | Florian Pelgrin (EDHEC Business School); Alain Venditti (Aix-Marseille Univ., CNRS, AMSE and EDHEC Business School) |
| Abstract: | This paper provides a long-run cycle perspective to explain the behavior of the annual flow of inheritance as identified by Piketty [51] for France and Atkinson [3] for the UK. Using a two-sector Barro-type [9] OLG model with non-separable preferences and bequests, we show that endogenous fluctuations are likely to occur through period-2 cycles or Hopf bifurcations. Two key mechanisms, which can generate independently or together quasi-periodic cycles, can be identified as long as agents are sufficiently impatient. The first mechanism relies on the elasticity of intertemporal substitution or equivalently the sign of the cross-derivative of the utility function whereas the second rests on sectoral technologies through the sign of the capital intensity difference across two sectors. Furthermore, building on the quasi-palindromic nature of the degree-4 characteristic equation, we derive some meaningful sufficient conditions associated to the occurrence of complex roots in a two-sector OLG model. Finally, we show that our theoretical results are consistent with some empirical evidence for medium- and long-run swings in the inheritance flows as a fraction of national income in France over the period 1896-2008. |
| Keywords: | two-sector overlapping generations model, optimal growth, endogenous fluctuations, quasi-palindromic polynomial, periodic and quasi-periodic cycles, altruism, bequest |
| JEL: | C62 E32 O41 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2048&r=all |
| By: | Raúl López-Pérez; Aldo Ramírez-Almudio |
| Abstract: | The social and economic factors leading to selfless acts such as charitable donations have been a central concern in the social sciences. We contribute to this scholarship with an artefactual field experiment in Peru where subjects anonymously decide how much of their endowment they freely donate to the Peruvian government. The standard rational choice model and several well-known models of non-selfish preferences predict zero giving. Yet we observe that around 75% of the subjects give something (N = 164), with substantial heterogeneity. Further, individual donations depend positively on the level of support to the government and beliefs about the average donation. Additional evidence on the role of beliefs comes from one treatment in which these beliefs are exogenously shaped, resulting in a change in the distribution of donations. Our results are consistent with a utility theory based on outcome-oriented social norms, which we develop in detail, and suggest that people are willing to contribute to their governments if they believe that enough others give as well and that the money is not wasted or ‘stolen’ by the government, but used to promote social welfare. |
| Keywords: | Altruism, Donations, Norms, Public Goods, Social Information |
| JEL: | D64 D91 H41 |
| URL: | http://d.repec.org/n?u=RePEc:ipp:wpaper:2007&r=all |
| By: | Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Antonios Staras; Robert Sugden |
| Abstract: | Choice-theoretic and philosophical accounts of rationality and reasoning address a multi-attitude psychology, including beliefs, desires, intentions, etc. By contrast, logicians traditionally focus on beliefs only. Yet there is logic in multiple attitudes. We propose a generalization of the three standard logical requirements on beliefsconsistency, completeness, and deductive closedness-towards multiple attitudes. How do these three logical requirements relate to rational requirements, e.g., of transitive preferences or non-akratic intentions? We establish a systematic correspondence: each logical requirement (consistency, completeness, or closedness) is equivalent to a class of rational requirements. Loosely speaking, this correspondence connects the logical and rational approaches to psychology. Addressing John Broome's central question, we characterize the extent to which reasoning can help achieve consistent, complete, or closed attitudes, respectively. |
| Date: | 2020–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03023012&r=all |
| By: | Dehez, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | How to allocate the probability of success resulting from the joint actions of a group of players? To address this question, Hou et al. (Operations Research Letters 46, 2018) propose to use the Shapley value of a transferable utility game, a "probability game" assuming probabilistic independence. The purpose of the present note is to analyze the properties of probability games and their duals and to study various solution concepts, in particular the core and the Shapley value. We give an axiomatic foundation of the Shapley value on the class of probability games and we investigate the link between different solution concepts, including asymmetric values. |
| Keywords: | Game theory |
| Date: | 2020–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2020035&r=all |
| By: | Anis Matoussi; Mohamed Mrad (UP13 - Université Paris 13) |
| Abstract: | This work concerns the study of consistent dynamic utilities in a financial market with jumps. We extend the results established in the paper [EKM13] to this framework. The ideas are similar but the difficulties are different due to the presence of the Lévy process. An additional complexity is clearly the interpretation of the terms of jumps in the different problems primal and dual one and relate them to each other. To do, we need an extension of the Itô-Ventzel's formula to jump's frame. By verification, we show that the dynamic utility is solution of a non-linear second order stochastic partial integro-differential equation (SPIDE). The main difficulty is that this SPIDE is forward in time, so there are no results in the literature that ensure the existence of a solution or simply allow us to deduce important properties, in our study, such as concavity or monotonicity. Our approach is based on a complete study of the primal and the dual problems. This allows us, firstly, to establish a connection between the utility-SPIDE and two SDEs satisfied by the optimal processes. Based on this connection and the SDE's theory, stochastic flow technics and characteristic method allow us, secondly, to completely solve the equation; existence, uniqueness, monotony and concavity. * This research benefited from the support of the "Chair Risques Émergents ou atypiques en Assurance", under the aegis of Fondation du Risque, a joint initiative by Le Mans Université, École polytechnique and l'Entreprise MMA and the support of the "Labex MME-DII". |
| Keywords: | forward utility,stochastic PDE with jumps,Stochastic flows,stochastic characteristics method,performance criteria,horizon-unbiased utility,consistent utility,progressive utility,portfolio optimization,duality |
| Date: | 2020–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03025475&r=all |
| By: | Victor Augias; Daniel M. A. Barreto |
| Abstract: | How can motivated thinking impact strategic information disclosure? We investigate this question by modelling a game of persuasion in which Receiver is a "wishful thinker" in the fashion of Caplin and Leahy (2019). Following reception of Sender's signal, Receiver optimally chooses its subjective belief by trading off the anticipatory utility she derives from being optimistic and the psychological cost of distorting beliefs. We derive the optimal correspondence between Bayesian and motivated belief and characterize conditions on primitives of the model that define whether the persuader is better or worse off when facing a wishful thinker vis-\`a-vis the Bayesian canonical model of Kamenica and Gentzkow (2011). We apply those results to explain some stylized facts such as why financial advisors often mislead their clients and why informational interventions are often inefficient in inducing more investment in preventive health treatments. Finally, we extend the model to a binary majority voting setting in which wishful voters hold heterogeneous partisan preferences. We show that, if voters' preferences are symmetrically distributed around the median voter, optimal public persuasion induces maximum belief polarization in the electorate. This formalizes a new mechanism for the emergence of polarization: as a byproduct of strategic information disclosure to wishful agents. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.13846&r=all |
| By: | Koohyun Kwon; Soonwoo Kwon |
| Abstract: | We provide an inference procedure for the sharp regression discontinuity design (RDD) under monotonicity, with possibly multiple running variables. Specifically, we consider the case where the true regression function is monotone with respect to (all or some of) the running variables and assumed to lie in a Lipschitz smoothness class. Such a monotonicity condition is natural in many empirical contexts, and the Lipschitz constant has an intuitive interpretation. We propose a minimax two-sided confidence interval (CI) and an adaptive one-sided CI. For the two-sided CI, the researcher is required to choose a Lipschitz constant where she believes the true regression function to lie in. This is the only tuning parameter, and the resulting CI has uniform coverage and obtains the minimax optimal length. The one-sided CI can be constructed to maintain coverage over all monotone functions, providing maximum credibility in terms of the choice of the Lipschitz constant. Moreover, the monotonicity makes it possible for the (excess) length of the CI to adapt to the true Lipschitz constant of the unknown regression function. Overall, the proposed procedures make it easy to see under what conditions on the underlying regression function the given estimates are significant, which can add more transparency to research using RDD methods. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.14216&r=all |
| By: | Bastien Baldacci; Jerome Benveniste; Gordon Ritter |
| Abstract: | A hypothetical risk-neutral agent who trades to maximize the expected profit of the next trade will approximately exhibit long-term optimal behavior as long as this agent uses the vector $p = \nabla V (t, x)$ as effective microstructure alphas, where V is the Bellman value function for a smooth relaxation of the problem. Effective microstructure alphas are the steepest-ascent direction of V , equal to the generalized momenta in a dual Hamiltonian formulation. This simple heuristics has wide-ranging practical implications; indeed, most utility-maximization problems that require implementation via discrete limit-order-book markets can be treated by our method. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.12945&r=all |
| By: | Fernando V. Ferreira; Maisy Wong |
| Abstract: | This paper presents a new framework to estimate preferences for neighborhoods in the presence of individual imperfect information about every amenity in each neighborhood. We estimate the model with data from a new neighborhood choice program that provided information about market rents and same-school network, and collected neighborhood rankings for the same individual before and after receiving information. We find that switchers - who change rankings after the information intervention - increase network shares by 1.46 percentage points and decrease rents by $430. This variation from the panel data of individual rankings is critical to produce a latent quality index that addresses biases arising from imperfect information. Estimates from the neighborhood sorting model reveal a strong negative marginal utility of rents, and a positive marginal willingness to pay of $123 per month to live in a neighborhood with a larger network. Finally, information also influenced residential choices after graduation. |
| JEL: | C1 J60 R0 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28165&r=all |
| By: | Botha, Ferdi (University of Melbourne); Ribar, David C. (Georgia State University) |
| Abstract: | This paper considers the association between intra-household resource allocation and couple financial hardships in Australia. It develops and estimates a collective household model of expenditures on individual-specific necessities and hardship reporting where each partner has a distinct utility function and household decisions are assumed to be Pareto efficient. Using data from the 16th wave of the Household, Income, and Labour Dynamics in Australia Survey with unique questions on individual financial hardships, this paper addresses disadvantage brought about by financial hardships that may be shaped in part by the distributions of preferences and bargaining power within households. Wives report more hardships than husbands. Estimates indicate that wives have weaker preferences than husbands for expenditures on necessary goods for themselves, but there is no evidence of differences in bargaining power. Estimates further indicate that hardships increase with the number of children and each spouse's disability status and decrease with their ages and subjective financial capabilities. |
| Keywords: | financial hardship, intra-household allocation, couples, Australia |
| JEL: | D12 D13 I31 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13935&r=all |
| By: | Albagli, Elias; Hellwig, Christian; Tsyvinski, Aleh |
| Abstract: | We argue that noisy aggregation of dispersed information provides a unifixed explanation for several prominent cross-sectional return anomalies such as returns to skewness, returns to disagreement and corporate credit spreads. We characterize asset returns with noisy information aggregation by means of a risk-neutral probability measure that features excess weight on tail risks, and link the latter to observable moments of earnings forecasts, in particular forecast dispersion and accuracy. We calibrate our model to match these moments and show that it accounts for a large fraction of the empirical return premia. We further develop asset pricing tools for noisy information aggregation models that do not impose strong parametric restrictions on economic primitives such as preferences, information, or return distributions. |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:125088&r=all |
| By: | Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Ponthiere, Gregory (Université catholique de Louvain) |
| Abstract: | This paper reexamines the design of the optimal lockdown strategy by paying attention to its robustness to the postulated social welfare cri- terion. We first characterize optimal lockdown under utilitarianism, and we show that this social criterion can, under some conditions, imply a COVID-19 variant of Parfit's (1984) Repugnant Conclusion: for any non- maximal lockdown saving lives at the cost of reducing average utility at a given period, there exists always a stricter lockdown, which further reduces average utility, but leads to a larger aggregate welfare. The optimal lock- down under utilitarianism is also shown to deteriorate the situation of the worst-off, against Hammond Equity. In order to do justice to Hammond Equity, we characterize optimal lockdown under the ex post egalitarian criterion, which gives absolute priority to the worst-off ex post. Under general conditions, the ex post egalitarian optimum involves a zero lock- down. Varying between zero and its maximal level, the optimal lockdown policy is not robust to the postulated ethical criterion. |
| Keywords: | Covid-19 ; lockdown ; optimal policy ; social welfare |
| JEL: | I18 I31 J18 |
| Date: | 2020–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2020032&r=all |
| By: | Simon Clark |
| Abstract: | I analyse a marriage market with transferable utility when the output of two matched agents is a decreasing function of the difference in their types i.e. like attracts like. The pattern of sorting and payoffs exhibit many features not found in the standard model, where more is always better. Full positive sorting occurs not only if the output function is concave (equivalent to supermodularity) but also if the distribution of types is the same on each side of the market, regardless of the technology. Convexity of the output function is not in general equivalent to submodularity and negative sorting occurs only if there is no overlap in the two type distributions; otherwise there is a mix of perfect matching and negative sorting. For both sides of the market, payoffs as a function of type tend to display a wavelike pattern and are only weakly connected to the quality of the match an agent is in. At types where one payoff function is increasing, the other is decreasing. With convexity, we have maximum possible matching of like with exactly like, so for agents on the long side of the market their optimal choice of partner is not unique. Even though like is attracted to like, having a type close to the mean type on the other side does not always imply a high payoff, and when the marriage market is embedded in a wider economy providing outside options such agents may well remain single. |
| Keywords: | Matching; sorting; marriage market; horizontal heterogeneity; homophily; transferable utility. |
| JEL: | C7 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:295&r=all |
| By: | Schlicht, Ekkehart |
| Abstract: | For non-economists, it is often difficult to understand why economists place so much emphasis on the self-interest motive. It is obvious that people act out of a variety of motives - gratitude, anger, social obligation and many, many other motives. There are several reasons why economists still put the self-interest motive in the foreground. Three points of view seem particularly important: - homo economicus as a useful approximation - homo economicus as an ideal type - homo oeconomicus as as-if construction These justifications for the self-interest or homo-economicus assumption are briefly characterized.. It is explained why these justifications cannot be empirically disproved. Only their relevance can be questioned. Subsequently, the evolutionary point of view that underlies the as-if defense of homo economicus is radicalized and it is argued that it is appropriate to approach norm formation theoretically and experimentally from a psychological point of view. |
| Keywords: | behavioral economics; rational choice; evolutionary economics; anomalies; bounded rationality; institutional economics; norm erosion |
| JEL: | D9 B13 B15 D01 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:74501&r=all |
| By: | Navonil Deb; Abhinandan Dalal; Gopal Krishna Basak |
| Abstract: | Markov Decision Processes and Dynamic Treatment Regimes have grown increasingly popular in the treatment of diseases, including cancer. However, cancer treatment often impacts quality of life drastically, and people often fail to take treatments that are sustainable, affordable and can be adhered to. In this paper, we emphasize the usage of ambient factors like profession, radioactive exposure, food habits on the treatment choice, keeping in mind that the aim is not just to relieve the patient of his disease, but rather to maximize his overall physical, social and mental well being. We delineate a general framework which can directly incorporate a net benefit function from a physician as well as patient's utility, and can incorporate the varying probabilities of exposure and survival of patients of varying medical profiles. We also show by simulations that the optimal choice of actions often is sensitive to extraneous factors, like the financial status of a person (as a proxy for the affordability of treatment), and that these actions should be welcome keeping in mind the overall quality of life. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.13960&r=all |