nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒03‒22
nineteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Non-parametric upper bounds on risk aversion with mean-variance utility By Denny, Kevin
  2. Beauty and Preferences Formation Exemplified in the Sports Market By Hannah Josepha Rachel Altman; Morris Altman; Benno Torgler and Stephen Whyte
  3. The benefits of being misinformed By Marcus Roel; Manuel Staab
  4. Intertemporal Choice Experiments and Large-Stakes Behavior By Aycinena, D; Blazsek, S; Rentschler, L; Sprenger, C
  5. Motivated Information Acquisition in Social Decisions By Si Chen; Carl Heese
  6. The grand dividends value By Besner, Manfred
  7. Oligopoly model with interdependent preferences: existence and uniqueness of Nash equilibrium By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  8. Frank H. Knight on Social Values in Economic Consumption. An archival note By Luca Fiorito,; Massimiliano Vatiero
  9. A Soul's View of the Optimal Population Problem By David de la Croix; Matthias Doepke
  10. What Do Happiness Data Mean? Theory and Survey Evidence By Daniel J. Benjamin; Jakina Debnam Guzman; Marc Fleurbaey; Ori Heffetz; Miles Kimball
  11. Value of Risky Lifestyle Choices By Chloé Michel; Michelle Sovinsky; Steven Stern
  12. Robust equilibrium strategies in a defined benefit pension plan game By Guohui Guan; Jiaqi Hu; Zongxia Liang
  13. Why Do Migrants Stay Unexpectedly? Misperceptions and Implications for Integration By Kaufmann, Marc; Machado, Joël; Verheyden, Bertrand
  14. Macroprudential Regulation in the Post-Crisis Era: Has the Pendulum Swung Too Far? By Lyu, Juyi; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  15. Bayesian optimal investment and reinsurance with dependent financial and insurance risks By Nicole B\"auerle; Gregor Leimcke
  16. Welfare v. Consent: On the Optimal Penalty for Harassment By Ratul Das Chaudhury; Birendra Rai; Liang Choon Wang; Dyuti Banerjee
  17. Disentangle the Florentine Families Network by the Pre-Kernel By Meinhardt, Holger Ingmar
  18. On the marginal utility of fiat money: insurmountable circularity or not? By Michael Reiss
  19. Generalized Social Marginal Welfare Weights Imply Inconsistent Comparisons of Tax Policies By Itai Sher

  1. By: Denny, Kevin
    Abstract: Based on a simple prior, this note derives upper bounds for the coefficient of absolute & relative risk aversion if utility can be written as depending linearly on the mean and variance of income.
    Date: 2021–03–09
  2. By: Hannah Josepha Rachel Altman; Morris Altman; Benno Torgler and Stephen Whyte
    Abstract: Beauty has been used as a fast and frugal heuristic, and therefore an important determinant of choice, as highlighted in research by Hamermesh. In a world of asymmetric information, beauty represents a proxy for objective characteristics or an object of desire, according to an individual’s preferences. A correlate of beauty, sexiness, has been used in sports to choose trainers or even to select the athletes expected to perform best, with people paying a premium for this beauty or sexiness. We argue that beauty can be a good or bad heuristic depending on the objective relationship between beauty and what it proxies. When it is a bad heuristic, it generates sub‐optimal outcomes for sports organizations. We discuss the conditions under which the beauty or sexiness heuristic generates sub‐optimal outcomes, why rational agents choose such a heuristic, and the conditions under which bad heuristics are sustainable. We also discuss this heuristic and the beauty premium in the context of Becker’s economic theory of discrimination, wherein rational decision‐makers trade‐off material considerations for the utility gained by contracting beautiful and sexy individuals. The latter has implications for the economic sustainability of an organization.
    Keywords: -
    Date: 2021–03
  3. By: Marcus Roel (BNU - Beijing Normal University); Manuel Staab (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)
    Abstract: In the spirit of Blackwell (1951), we analyze how two fundamental mistakes in information processing-incorrect beliefs about the world and misperception of information-affect the expected utility ranking of information experiments. We explore their individual and combined influence on welfare and provide necessary and sufficient conditions when mistakes alter and possibly reverse the ranking of information experiments. Both mistakes by themselves reduce welfare in a model where payoff relevant actions also generate informative signals. This is true for naive decisionmakers, unaware of any errors, as well as for sophisticated decision-makers, who account for the possibility of mistakes. However, mistakes can interact in non-obvious ways and an agent might be better off suffering from both, rather than just one. We provide a characterization when such positive interactions are possible. Surprisingly, this holds true only for naive decision-makers and thus naivete can be beneficial. We discuss implications for information acquisition and avoidance, welfare-improving belief manipulation, and policy interventions in general.
    Keywords: ranking of experiments,information acquisition,misperception,confirmation bias,overconfidence,underconfidence
    Date: 2021–02–16
  4. By: Aycinena, D; Blazsek, S; Rentschler, L; Sprenger, C
    Abstract: Intertemporal choice experiments are frequently implemented to make inference about time preferences, yet little is known about the predictive power of resulting measures. This project links standard experimental choices to a decision on the desire to smooth a large-stakes payment — around 10% of annual income — through time. In a sample of around 400 Guatemalan Conditional Cash Transfer recipients, we find that preferences over large-stakes payment plans are closely predicted by experimental measures of patience and diminishing marginal utility. These represent the first findings in the literature on the predictive content of experimentally elicited intertemporal preferences for large-stakes decisions.
    Keywords: Structural estimation; Out-of-sample prediction; Discounting; Convex Time Budget
    JEL: D1 D3 D90
    Date: 2019–12–08
  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: Besner, Manfred
    Abstract: We introduce a new value for games with transferable utility, called grand dividends value. In the payoff calculation, the grand dividends value takes into account the worths of all subcoalitions of a player set. The concept of grand dividends, representing the surplus (which can also be non-positive) of the worth of the grand coalition over the worths of all coalitions that lack one player of the player set, is the initial point here. The grand dividends value satisfies many properties that we know from the Shapley value. Along with new axioms that have a similar correspondence to axioms that are also satisfied by the Shapley value, axiomatizations arise that have an analogous equivalent for the Shapley value, including the classics of Shapley and Young.
    Keywords: Cooperative game; (Harsanyi/Grand) Dividends; Shapley value; Grand dividends value
    JEL: C7 C71
    Date: 2021–03–16
  7. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: We propose a model to describe and study the effect of social interdependent preferences in a Cournot oligopoly based on a game in which the utility functions of firms depend on a combination of weighted profits of their competitors. If social interaction is neglected, the model reduces to the classic Cournot game, diverting from it as the role of social interaction becomes more and more relevant. Several synthetic measures are proposed to summarize the overall behavior of the agents and some configurations characterized by particular interactional structures are presented. Finally, the study of the well-posedness of the proposed framework is investigated, in terms of the existence and uniqueness of Nash equilibria. To this end, we generalize the conditions under which the existence and/or uniqueness of Nash equilibrium in classic game is guaranteed for particular Cournotian oligopoly models without interdependent preferences. In particular, we focus on two families of oligopolies, respectively consisting of "concave" oligopolies and oligopolies with isoelastic demand function.
    Keywords: Cournot Game, Preference interdependence, Network, Nash Equilibrium, existence and uniqueness
    JEL: D43 C62 C70
    Date: 2021–03
  8. By: Luca Fiorito,; Massimiliano Vatiero
    Abstract: This note reproduces an unpublished paper on "Social Values in Economic Consumption" which Knight prepared for the Social Science Research Council (SSRC) Summer Conference, on Nantucket, Massachusetts in June 1931. This paper sheds new light on Knight in two important respects. First, it presents, in a more systematic fashion, Knight’s criticism of what he perceived to be the then standard theory of consumption. Specifically, Knight argued that an individual's consumption is dictated more by his income in relation to others than by mere utility maximization—a notion now commonly known as relative income hypothesis. In this connection, Knight also pointed out that a general increase in income, not only leaves the individual’s relative position in society unaltered but makes her/his situation worse off due to the peculiar characteristics of the market for “personal services.†Second, this unpublished address provides further evidence of how, in spite of some substantial differences in terms of methodology, his research interests converged in many respects with those of the institutionalists.
    Date: 2021
  9. By: David de la Croix (Université Catholique de Louvain); Matthias Doepke (Northwestern University)
    Abstract: A long-standing challenge for welfare economics is to develop welfare criteria that can be applied to allocations with different population levels. Such a criterion is essential to resolve the optimal population problem, i.e., the tradeoff between population size and the welfare of each person alive. A welfare criterion that speaks to this issue inherently requires evaluating the welfare of nonexistent people, because some people exist only in some allocations but not in others. To make progress, we consider the population problem in an environment where population is variable, but there is a fixed supply of souls, who may experience multiple incarnations over time. Rather than pondering the value of nonexistence, from the souls’ perspective comparing larger or smaller populations merely involves valuing shorter or longer waits until the next incarnation. We argue that such comparisons are possible on the basis of introspection and lead to intuitive welfare criteria with attractive properties. We emphasize that one does not have to believe in reincarnation to accept the resulting criteria—rather, reincarnation serves as a metaphor to facilitate the necessary utility comparisons.
    Keywords: population growth, reincarnation, introspection
    JEL: D63 J17 O43
    Date: 2021–03
  10. By: Daniel J. Benjamin (UCLA / NBER); Jakina Debnam Guzman (Amherst College); Marc Fleurbaey (Paris School of Economics); Ori Heffetz (Cornell University / The Hebrew University of Jerusalem / NBER); Miles Kimball (University of Colorado Boulder / NBER)
    Abstract: What utility notion do self-reported well-being (SWB) questions measure? We clarify the assumptions that underlie existing applications regarding the (i) life domains, (ii) time horizons, and (iii) other-regarding preferences captured by SWB data. We ask survey respondents what they had in mind regarding (i)–(iii) when answering commonly used—life satisfaction, happiness, ladder—and new SWB questions. Respondents put most weight on the present and on themselves—but not enough to interpret SWB data as measuring notions of flow utility and self-centered utility. We find differences across SWB questions and across sociodemographic groups. We outline actionable suggestions for SWB researchers.
    Keywords: happiness, life satisfaction, subjective well-being, survey questions
    JEL: D69 D90 I31
    Date: 2021–02–01
  11. By: Chloé Michel; Michelle Sovinsky; Steven Stern
    Abstract: Using rich data from the Panel Study of Income Dynamics on breast cancer diagnosis and lifestyle choices, we estimate how being diagnosed in‡uences smoking, drinking, and exercising habits for more than 9; 000 women over the period from 1999 to 2011. These data allow us to learn more about the trade-o¤s women are willing to make between participating in unhealthy (but enjoyable) habits and increasing one’s life expectancy. Our parameter estimates indicate that breast cancer diagnosis (and recency of diagnosis) impacts lifestyle choices. However, the impact of diagnosis has a di¤erent e¤ect on smoking, drinking, and exercising behavior, and the impact also depends upon the recency of the diagnosis. We …nd that women who had a diagnosis recently in their lives (within the last …ve years) exercise less and smoke less but do not change their drinking habits relative to healthy women. These changes in behavior are not always consistent with information provided to the public on breast cancer risk factors. However, we …nd that these choices are rationalized when one considers the overall value of life where lifestyle choices increase the utility of living. For a woman diagnosed with breast cancer, our results indicate that a woman will smoke only if the value placed on smoking is greater than 6% of the total utility from being alive. We …nd the threshold is lower for drinking where drinking has a positive impact on the value of life if the value placed on drinking is greater than 3% of the total utility from being alive. Finally, a woman with breast cancer will …nd it valuable to engage in exercise even when it brings disutility of 3% of the value of living. Using conventional estimates for the value of a year of life, we …nd that these choices imply smoking is valued at about $49; 000 per year for smokers, drinking is valued at about $29; 500 per year for drinkers, and exercising is valued at about $28; 200 for exercisers.
    Keywords: breast cancer, risky health behavior, health economics
    JEL: I12 J16 C35
    Date: 2021–03
  12. By: Guohui Guan; Jiaqi Hu; Zongxia Liang
    Abstract: This paper investigates the robust {non-zero-sum} games in an aggregated {overfunded} defined benefit (abbr. DB) pension plan. The sponsoring firm is concerned with the investment performance of the fund surplus while the participants act as a union to claim a share of the fund surplus. The financial market consists of one risk-free asset and $n$ risky assets. The firm and the union both are ambiguous about the financial market and care about the robust strategies under the worst case scenario. {The union's objective is to maximize the expected discounted utility of the additional benefits, the firm's two different objectives are to maximizing the expected discounted utility of the fund surplus and the probability of the fund surplus reaching an upper level before hitting a lower level in the worst case scenario.} We formulate the related two robust non-zero-sum games for the firm and the union. Explicit forms and optimality of the solutions are shown by stochastic dynamic programming method. In the end of this paper, numerical results are illustrated to depict the economic behaviours of the robust equilibrium strategies in these two different games.
    Date: 2021–03
  13. By: Kaufmann, Marc (Central European University); Machado, Joël (LISER); Verheyden, Bertrand (LISER (CEPS/INSTEAD))
    Abstract: Empirical evidence suggests that a large proportion of immigrants who initially intended to stay temporarily in the destination country end up staying permanently, which may lead to suboptimal integration. We study systematic causes of unexpected staying that originate in migrant misperceptions. Our framework contains uncertainty about long-term wages, endogenous integration and savings in the short term, and return migration in the long term. We identify necessary and sufficient conditions on misperceptions that lead migrants to overestimate their probability of return migration, independently of their characteristics. We show that these conditions involve pessimism about the destination country, either in terms of short-term utility, of long-term utility, or of wage prospects. We then highlight specific behavioural biases that give rise to such forms of pessimism. Using the German Socio-Economic Panel, we find that relatively higher pessimism at arrival about future utility and wages is associated with migrants staying unexpectedly ex post.
    Keywords: migrant integration, return intentions, unexpected staying, misperceptions, pessimism, GSOEP
    JEL: F22 D91 J61
    Date: 2021–03
  14. By: Lyu, Juyi (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: This paper presents an institutional model to investigate the cooperation between a government and a central bank. The former selects the monetary policy and then delegates the organization of macroprudential policy to the latter. Their policy stances are the result of sequential constrained utility maximization. Using indirect inference, we find a set of coefficients that can capture the UK policy stances for 1993-2016. This suggests post-crisis regulation has been overly intrusive. Finally, we show that this regulatory dilemma can be avoided by committing to a highly stabilizing monetary regime that uses QE extensively.
    Keywords: Bank regulation; Financial stability; Monetary policy; Public choice theory
    JEL: E52 E58 G28
    Date: 2021–03
  15. By: Nicole B\"auerle; Gregor Leimcke
    Abstract: Major events like natural catastrophes or the COVID-19 crisis have impact both on the financial market and on claim arrival intensities and claim sizes of insurers. Thus, when optimal investment and reinsurance strategies have to be determined it is important to consider models which reflect this dependence. In this paper we make a proposal how to generate dependence between the financial market and claim sizes in times of crisis and determine via a stochastic control approach an optimal investment and reinsurance strategy which maximizes the expected exponential utility of terminal wealth. Moreover, we also allow that the claim size distribution may be learned in the model. We give comparisons and bounds on the optimal strategy using simple models. What turns out to be very surprising is that numerical results indicate that even a minimal dependence which is created in this model has a huge impact on the control in the sense that the insurer is much more prudent then.
    Date: 2021–02
  16. By: Ratul Das Chaudhury; Birendra Rai; Liang Choon Wang; Dyuti Banerjee
    Abstract: The economic approach to determine optimal legal policies involves maximizing a social welfare function. We propose an alternative: a consent-approach that seeks to promote consensual interactions and deter non-consensual interactions. The consent-approach does not rest upon inter-personal utility comparisons or value judgments about preferences. It does not require any additional information relative to the welfare-approach. We highlight the contrast between the welfare-approach and the consent-approach using a stylized model inspired by seminal cases of harassment and the #MeToo movement. The social welfare maximizing penalty for harassment in our model can be zero under the welfare-approach but not under the consent-approach.
    Date: 2021–02
  17. By: Meinhardt, Holger Ingmar
    Abstract: For different model settings we conduct power analyses on the Florentine families network of the 15th century while referring to the most popular power indices like the Shapley-Shubik or Banzhaf value as well as to the pre-nucleolus and pre-kernel. In order to assess their capacity to identify the main protagonists that correspond with the chronicles, we inspect of how the power distributions are spread around the mean. Distributions that are clustered to close around the mean cannot identify outstanding positions. In this respect, they failed to provide a scenario that corresponds with the annals. As it turns out, the pre-kernel solution – as a solution concept designed for studying bargaining situations – retrieves the most accurate image for the examined network structures. Last but not least, we discovered two new non-homogeneous weighted majority games with a disconnected pre-kernel.
    Keywords: Transferable Utility Game, (Non-)Homogeneous Game, Disconnected Pre-Kernel, Convex Analysis, Fenchel-Moreau Conjugation, Pre-Nucleolus, Shapley-Shubik Index, Banzhaf Value, Deegan-Packel Index, Johnston Index, Public Good Index.
    JEL: C71
    Date: 2021–03–06
  18. By: Michael Reiss
    Abstract: The question of how a pure fiat currency is enforced and comes to have a non-zero value has been much debated \cite{10.2307/2077948}. What is less often addressed is, in the case where the enforcement is taken for granted and we ask what value (in terms of goods and services) the currency will end up taking. Establishing a decentralised mechanism for price formation has proven a challenge for economists: "Since no decentralized out-of-equilibrium adjustment mechanism has been discovered, we currently have no acceptable dynamical model of the Walrasian system" (Gintis 2006). In his paper, Gintis put forward a model for price discovery based on the evolution of the model's agents, i.e. "poorly performing agents dying and being replaced by copies of the well performing agents." It seems improbable that this mechanism is the driving force behind price discovery in the real world. This paper proposes a more realistic mechanism and presents results from a corresponding agent based model.
    Date: 2021–03
  19. By: Itai Sher (University of Massachusetts Amherst)
    Abstract: This paper concerns Saez and Stantcheva’s (2016) generalized social marginal welfare weights (GSMWW), which are used to aggregate losses and gains due to the tax system, while incorporating non-utilitarian ethical considerations. That approach evaluates local changes in tax policy without appealing to a global social objective. However, I argue that local comparisons between different tax systems implicitly entail global comparisons. Moreover, whenever welfare weights are not of a utilitarian kind, these implied global comparisons are inconsistent. Part of the motivation for the GSMWW approach is that it provides a way to incorporate broader ethical judgements into the evaluation of the tax system while preserving the Pareto principle. I suggest that the problems with the approach ought to spark a reconsideration of Pareto if one wants to represent broader values in formal policy analysis.
    Keywords: welfare weights, optimal taxation, utilitarianism, Pareto principle
    JEL: D63 H21 H23
    Date: 2021–03

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