nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒01‒18
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Model Uncertainty in Climate Change Economics: A Review and Proposed Framework for Future Research By Loïc Berger; Massimo Marinacci
  2. Three layers of uncertainty and the role of model misspecification By Ilke Aydogan; Loïc Berger; Valentina Bosetti; Ning Liu
  3. Ambiguity and investor behavior By Kostopoulos, Dimitrios; Meyer, Steffen; Uhr, Charline
  4. On the long-run fluctuations of inheritance in two-sector OLG models By Florian Pelgrin; Alain Venditti
  5. mlogit: Random Utility Models in R By Yves Croissant
  6. Probabilistic Choice Models By Gair, J. R.; Iyer, S.; Velu, C.
  7. Business Cycles as Collective Risk Fluctuations By Victor Olkhov
  8. Extended Gini Index By Ram Sewak Dubey; Giorgio Laguzzi
  9. Debiasing Through Experience Sampling: The Case of Myopic Loss Aversion. By Christian König-Kersting
  10. Constrained Efficient Borrowing with Sovereign Default Risk By Juan Carlos Hatchondo; Leonardo Martinez; Francisco Roch
  11. Invisible hand at consumption-leisure production possibility frontier: the allocation of time between goods and services under wage and price dispersions. By Malakhov, Sergey

  1. By: Loïc Berger; Massimo Marinacci (Bocconi University [Milan, Italy])
    Abstract: We review recent models of choices under uncertainty that have been proposed in the economic literature. In particular, we show how different concepts and methods of economic decision theory can be directly useful for problems in environmental economics. The framework we propose is general and can be applied in many different fields of environmental economics. To illustrate, we provide a simple application in the context of an optimal mitigation policy under climate change.
    Keywords: Ambiguity,non-expected utility,model uncertainty,climate change
    Date: 2020–09–19
  2. By: Ilke Aydogan (IÉSEG School Of Management [Puteaux]); Loïc Berger (CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna]); Valentina Bosetti (Bocconi University [Milan, Italy], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna]); Ning Liu (Beihang University)
    Abstract: We explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) risk, which entails inherent randomness within a given probability model; (2) model uncertainty, which entails subjective uncertainty about the probability model to be used; and (3) model misspecification, which entails uncertainty about the presence of the correct probability model among the set of models considered. Using a new experimental design, we measure individual attitudes towards these di↵erent layers of uncertainty and examine the role of each of them in characterizing attitudes towards ambiguity. In addition to providing new insights into the underlying processes behind ambiguity aversion, our study provides the first empirical evidence of the role of model misspecification in decision-making under uncertainty.
    Keywords: Ambiguity aversion,model uncertainty,model misspecification,non-expected utility,reduction of compound lotteries
    Date: 2020–11–30
  3. By: Kostopoulos, Dimitrios; Meyer, Steffen; Uhr, Charline
    Abstract: We relate time-varying aggregate ambiguity (V-VSTOXX) to individual investor trading. We use the trading records of more than 100,000 individual investors from a large German online brokerage from March 2010 to December 2015. We find that an increase in ambiguity is associated with increased investor activity. It also leads to a reduction in risk-taking which does not reverse over the following days. When ambiguity is high, the effect of sentiment looms larger. Survey evidence reveals that ambiguity averse investors are more prone to ambiguity shocks. Our results are robust to alternative survey-, newspaper- or market-based ambiguity measures.
    Keywords: ambiguity,uncertainty,individual investor,risk-taking,trading behavior
    JEL: D10 D81 D90 G11 G40
    Date: 2020
  4. By: Florian Pelgrin (École des hautes études commerciales du Nord (EDHEC)); Alain Venditti (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, École des hautes études commerciales du Nord (EDHEC))
    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
    Date: 2020–12–17
  5. By: Yves Croissant (CEMOI - Centre d'Économie et de Management de l'Océan Indien - UR - Université de La Réunion)
    Abstract: mlogit is a package for R which enables the estimation of random utility models with choice situation and/or alternative specific variables. The main extensions of the basic multinomial model (heteroscedastic, nested and random parameter models) are implemented.
    Keywords: discrete choice models,maximum likelihood estimation,R,econometrics
    Date: 2020–10–07
  6. By: Gair, J. R.; Iyer, S.; Velu, C.
    Abstract: We examine a number of probabilistic choice models in which people might form their beliefs to play their strategies in a game theoretic setting in order to propose alternative equilibrium concepts to the Nash equilibrium. In particular, we evaluate the Blavatskyy model, Returns Based Beliefs (RBB) model, Quantal Response Equilibrium (QRE) model, Boundedly Rational Nash Equilibrium (BRNE) model and the Utility Proportional Beliefs (UPB) model. We outline the foundational axioms for these models and fully explicate them in terms of probabilistic actions, probabilistic beliefs and their epistemic characterizations. We test the model predictions using empirical data and show which models perform better under which conditions. We also extend the Blavatskyy model which was developed to consider games with two actions to cases where there are three or more actions. We provide a nuanced understanding of how different types of probabilistic choice models might predict better than others.
    Keywords: Subjective Probabilities, Decision Making, Cooperation
    Date: 2021–01–04
  7. By: Victor Olkhov
    Abstract: We suggest use continuous numerical risk grades [0,1] of R for a single risk or the unit cube in Rn for n risks as the economic domain. We consider risk ratings of economic agents as their coordinates in the economic domain. Economic activity of agents, economic or other factors change agents risk ratings and that cause motion of agents in the economic domain. Aggregations of variables and transactions of individual agents in small volume of economic domain establish the continuous economic media approximation that describes collective variables, transactions and their flows in the economic domain as functions of risk coordinates. Any economic variable A(t,x) defines mean risk XA(t) as risk weighted by economic variable A(t,x). Collective flows of economic variables in bounded economic domain fluctuate from secure to risky area and back. These fluctuations of flows cause time oscillations of macroeconomic variables A(t) and their mean risks XA(t) in economic domain and are the origin of any business and credit cycles. We derive equations that describe evolution of collective variables, transactions and their flows in the economic domain. As illustration we present simple self-consistent equations of supply-demand cycles that describe fluctuations of supply, demand and their mean risks.
    Date: 2020–12
  8. By: Ram Sewak Dubey; Giorgio Laguzzi
    Abstract: We propose an extended version of Gini index defined on the set of infinite utility streams, $X=Y^\mathbb{N}$ where $Y\subset \mathbb{R}$. For $Y$ containing at most finitely many elements, the index satisfies the generalized Pigou-Dalton transfer principles in addition to the anonymity axiom. However, in the general case of $Y$ containing infinitely many elements, real valued representation satisfying the generalized Pigou-Dalton transfer principle and anonymity is not possible.
    Date: 2020–12
  9. By: Christian König-Kersting
    Abstract: We study the robustness of Krupka and Weber's method (2013) for eliciting social norms. In two experiments with more than 1200 participants, we find that participants' response patterns are invariant to differences in the salience of the monetarily incentivized coordination aspect. We further demonstrate that asking participants for their personal first and second order beliefs without monetary incentives results in qualitatively identical responses. In addition, we observe that participants give sensible responses whether or not they understand the task or their monetary incentives. Overall, Krupka and Weber's method produces remarkably robust response patterns.
    Keywords: social norms, incentives, beliefs, task comprehension, robustness
    JEL: C72 C90 D90
    Date: 2021–02
  10. By: Juan Carlos Hatchondo; Leonardo Martinez; Francisco Roch
    Abstract: Using a quantitative sovereign default model, we characterize constrained efficient borrowing by a Ramsey government that commits to income-history-contingent borrowing paths taking as given ex-post optimal future default decisions. The Ramsey government improves upon the Markov government because it internalizes the effects of borrowing decisions in period t on borrowing opportunities prior to t. We show the effect of borrowing decisions in t on utility flows prior to t can be encapsulated by two single dimensional variables. Relative to a Markov government, the Ramsey government distorts borrowing decisions more when bond prices are more sensitive to borrowing, and changes in bond prices have a larger effect on past utility. In a quantitative exercise, more than 80% of the default risk is eliminated by a Ramsey government, without decreasing borrowing. The Ramsey government also has a higher probability of completing a successful deleveraging (without defaulting), while smoothing out the fiscal consolidation.
    Date: 2020–11–08
  11. By: Malakhov, Sergey
    Abstract: If the equilibrium price is equal to the lowest willingness to pay of consumers with zero search costs, it accumulates under price dispersion the willingness to sell of consumers with positive search costs. The searcher buys optimally at a low price, which equalizes marginal costs of his search with its marginal benefit and maximizes his consumption-leisure utility but now with respect to the equilibrium price. The suboptimal satisficing purchases represent corner solutions; consumers either buy optimally or quit the market. The producer meets the consumer with a price, like he knows in advance his willingness to pay and the time spent on search. The consumption-leisure production possibility frontier optimally allocates his time between production and delivery; it determines not only the quantity to be purchased and the price, but also the meeting point, where the producer stops consumer’s search and sells him goods with leisure. Being unaware of how much the consumer has spent on labor and search, the producer unintentionally optimizes his consumption-leisure choice.
    Keywords: invisible hand, consumption-leisure choice, production possibility frontier, search, price dispersion
    JEL: D11 D83
    Date: 2020–12–01

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