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on Utility Models and Prospect Theory |
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Issue of 2021‒03‒08
seven papers chosen by |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics); Bjerksund, Petter (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund’s expected real rate of return. The optimal spending rate secures that the fund will last ”forever”. Spending the expected return will deplete the fund with probability one. Moreover, this strategy is inconsistent with optimal portfolio choice. Our results are contrary to the idea that it is sustainable to spend the expected return of a sovereign wealth fund. |
| Keywords: | Optimal spending rate; endowment funds; expected utility; risk aversion; EIS; recursive utility |
| JEL: | D51 D53 D90 E21 G10 G12 |
| Date: | 2021–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2021_001&r=all |
| By: | André De Palma; Mogens Fosgerau; Julien Monardo (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We propose the Inverse Product Differentiation Logit (IPDL) model, a structural (inverse) demand model for differentiated products that captures market segmentation with segments that may overlap in any way. The IPDL model generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variable regression using aggregate data. We use the IPDL model to estimate the demand for cereals in Chicago. We then extend it to a general demand model that is consistent with a utility model of heterogeneous, utilitymaximizing consumers. |
| JEL: | C26 D11 D12 L |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-04&r=all |
| By: | Jeanne Hagenbach (Institut d'Urbanisme de Paris (IUP)); Frédéric Koessler (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We consider a single psychological agent whose utility depends on his action, the state of the world, and the belief that he holds about that state. The agent is initially informed about the state and decides whether to memorize it, otherwise he has no recall. We model the memorization process by a multi-self game in which the privately informed first self voluntarily discloses information to the second self, who has identical preferences and acts upon the disclosed information. We identify broad categories of psychological utility functions for which there exists an equilibrium in which every state is voluntarily memorized. In contrast, if there are exogenous failures in the memorization process, then the agent memorizes states selectively. In this case, we characterize the partially informative equilibria for common classes of psychological utilities. If the material cost of forgetting is low, then the agent only memorizes good enough news. Otherwise, only extreme news are voluntarily memorized. |
| Keywords: | Multi-self game,disclosure games,imperfect recall,selective memory,motivated beliefs,psychological games,anticipatory utility |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-03151009&r=all |
| By: | Laurence Jacquet; Etienne Lehmann |
| Abstract: | We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin. |
| Keywords: | optimal taxation, mechanism design, multidimensional screening problems, allocation perturbation |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8871&r=all |
| By: | Mogens Fosgerau (University of Copenhagen); Emerson Melo (Indiana University); Matthew Shum (California Institute of Technology); Jesper R.-V. Sørensen (University of Copenhagen) |
| Abstract: | This note provides several remarks relating to the conditional-choice probability (CCP) based estimation approaches for dynamic discrete-choice models. Specifically, the Arcidiacono and Miller [2011] estimation procedure relies on the “inverse-CCP” mapping (p) from CCP’s to choice-specific value functions. Exploiting the convex-analytic structure of discrete choice models, we discuss two approaches for computing this, using either linear or convex programming, for models where the utility shocks can follow arbitrary parametric distributions. Furthermore, the function is generally distinct from the “selection adjustment” term (i.e. the expectation of the utility shock for the chosen alternative), so that computational approaches for computing the latter may not be appropriate for computing . |
| Keywords: | dynamic discrete choice, random utility, linear programming, convex analysis, convex optimization |
| JEL: | C35 C61 D90 |
| Date: | 2021–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:2103&r=all |
| By: | Kevin J. Lansing |
| Abstract: | This paper develops a real business cycle model with eight fundamental shocks and one ìequity sentiment shockî that captures belief-driven áuctuations. I solve for the time series of shock realizations that allow the model to exactly replicate the observed time paths of U.S. macroeconomic variables and asset returns over the past six decades. The representative agentís perception that movements in equity value are partly driven by sentiment is close to self-fulÖlling. The model-identiÖed sentiment shock is strongly correlated with other fundamental shocks and implies ìpessimismîrelative to fundamental equity value in steady state. Counterfactual scenarios show that the sentiment shock and shocks that appear in the law of motion for capital (representing Önancial frictions) have large impacts on the levels of macroeconomic variables and the size of the equity risk premium. Other shocks have large impacts on the growth rates of macroeconomic variables. Four of the model-identiÖed shocks help to predict the equity risk premium or the bond term premium in the next quarter. Overall, the results support a narrative in which a large number of correlated shocks have combined to deliver the historical outcomes observed in U.S. data. |
| Keywords: | Belief-driven business cycles; Sentiment; Animal spirits; Risk aversion; Equity risk premium; Bond term premium |
| JEL: | E32 E44 O41 |
| Date: | 2021–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:89624&r=all |
| By: | David Dillenberger (University of Pennsylvania); Uzi Segal (Boston College) |
| Abstract: | We study a simple variant of the house allocation problem (one-sided matching). We demonstrate that agents with recursive preferences may systematically prefer one allocation mechanism to the other, even among mechanisms that are considered to be the same in standard models, in the sense that they induce the same probability distribution over successful matchings. Using this, we propose a new Priority Groups mechanism and provide conditions under which it is preferred to two popular mechanisms, Random Top Cycle and Random Serial Dictatorship. |
| Keywords: | House allocation problem, Non-expected utility, Random Top Cycle, Random Serial Dictatorship, Reduction of compound lotteries. |
| JEL: | D81 C78 |
| Date: | 2021–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:1027&r=all |