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on Utility Models and Prospect Theory |
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Issue of 2021‒04‒26
seven papers chosen by |
| By: | Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, 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, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Can a group be an orthodox rational agent? This requires the group's aggregate preferences to follow expected utility (static rationality) and to evolve by Bayesian updating (dynamic rationality). Group rationality is possible, but the only preference aggregation rules which achieve it (and are minimally Paretian and continuous) are the linear-geometric rules, which combine individual values linearly and combine individual beliefs geometrically. Linear-geometric preference aggregation contrasts with classic linear-linear preference aggregation, which combines both values and beliefs linearly, but achieves only static rationality. Our characterisation of linear-geometric preference aggregation has two corollaries: a characterisation of linear aggregation of values (Harsanyi's Theorem) and a characterisation of geometric aggregation of beliefs. |
| Keywords: | rational group agent,uncertainty,preference aggregation,opinion pooling,values aggregation,static versus dynamic rationality,expected-utility hypothesis,Bayesianism,group rationality versus Paretianism,spurious unanimity,ex-ante versus ex-post Pareto |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseptp:hal-03194928&r= |
| By: | Batabyal, Amitrajeet |
| Abstract: | In this note, we focus on the decision problem faced by a city authority (CA) who seeks to attract members of the creative class to her city by providing a local public good (LPG). We construct a stylized model of this interaction and shed light on three questions. First, we determine the optimal number of creative class members to attract when the CA maximizes the utility of each member who chooses to reside in the city. Second, assuming the CA provides the LPG optimally given the total number of resident members, we compute the loss borne by this CA from having a suboptimal number of members living in the city. Finally, we ascertain what number of members living in the city maximizes the total utility obtained by the CA and then compare this answer with our answer to the first question stated above. |
| Keywords: | City Authority, Creative Class, Local Public Good, Optimal Membership |
| JEL: | R11 R50 |
| Date: | 2020–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107028&r=all |
| By: | Fabien, Perez (ENSAE); Guillaume, Hollard (Ecole Polytechnique); Radu, Vranceanu (ESSEC Research Center, ESSEC Business School); Delphine, Dubart (ESSEC Research Center, ESSEC Business School) |
| Abstract: | This paper uses the test/retest data from the Holt and Laury (2002) experiment to provide estimates of the measurement error in this popular risk-aversion task. Maximum likelihood estimation suggests that the variance of the measurement error is approximately equal to the variance of the number of safe choices. Simulations confirm that the coefficient on the risk measure in univariate OLS regressions is approximately half of its true value. Unlike measurement error, the discrete transformation of continuous riskaversion is not a major issue. We discuss the merits of a number of different solutions: increasing the number of observations, IV and the ORIV method developed by Gillen et al. (2019). |
| Keywords: | ORIV; Experiments; Measurement error; Risk-aversion; Test/retest |
| JEL: | C18 C26 C91 D81 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-19011&r= |
| By: | Gregor Boehl; Cars Hommes |
| Abstract: | Can boundedly rational agents survive competition with fully rational agents? We develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational back- ward looking agents and evolving market shares depending on their relative performance. Our novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dy- namics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamen- tal value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks. |
| Keywords: | Heterogeneous agents, trend-extrapolation, bubbles, numerical solution method |
| JEL: | C63 E03 E32 E44 E51 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_287&r= |
| By: | M. Hashem Pesaran; Ron P. Smith |
| Abstract: | The arbitrage pricing theory (APT) attributes differences in expected returns to exposure to systematic risk factors, which are typically assumed to be strong. In this paper we consider two aspects of the APT. Firstly we relate the factors in the statistical factor model to a theoretically consistent set of factors defined by their conditional covariation with the stochastic discount factor (mt) used to price securities within inter-temporal asset pricing models. We show that risk premia arise from non-zero correlation of observed factors with mt; and the pricing errors arise from the correlation of the errors in the statistical factor model with mt: Secondly we compare estimates of factor risk premia using portfolios with the ones obtained using individual securities, and show that the identification conditions in terms of the strength of the factor are the same and that, in general, no clear cut ranking of the small sample bias of the two estimators is possible. |
| Keywords: | arbitrage pricing theory, stochastic discount factor, portfolios, factor strength, identification of risk premia, two-pass regressions, Fama-MacBeth |
| JEL: | C38 G12 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9001&r= |
| By: | Lionel de Boisde¤re (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | We consider a pure-exchange sequential economy, where uncertainty prevails and agents, possibly asymmetrically informed, exchange commodities, on spot markets, and securities of all kinds, on typically incomplete financial markets. Consumers have private characteristics, anticipations and beliefs, and no model to forecast prices. We show that they face an incompressible uncertainty, represented by a so-calles 'minimum uncertainty set', which adds to the exogenous uncertainty, on the state of nature, an uncertainty over the price to prevail, on every spot market. Equilibrium is reached when agents expect the 'true' price as a possible outcome on every spot market, and elect optimal strategies, which clear on all markets. We show this sequential equilibrium exists in standard conditions, when agents' anticipations embed the minimum uncertainty set. This outcome is stronger than Radner's (1979), Duffie-Shaffer's (1985) or De Boisdeffre's (2021), which prove the generic existence of equilibrium when agents make perfect forecasts. From an asymptotic argument, our main theorem is derived from De Boisdeffre's (2007), which characterizes the exitence of equilibria on purely financial markets by a no-arbitrage condition. |
| Abstract: | Nous considérons une économie d'échange pur, soumise à l'incertitude, où des agents dotés d'informations privées échangent des biens et des actifs financiers quelconques sur des marchés incomplets. Les consommateurs sont dotés de caractéristiques, d'anticipations et de croyances privées, mais pas de modèle de prix. Nous montrons qu'ils font face à une incertitude incompressible sur les prix spots, représentée par un ensemble dit 'd'incertitude minimale'. L'équilibre séquentiel est atteint lorsque les agents ont anticipé comme possibles les vrais prix de demain et choisi des stratégies optimales, qui équilibrent l'offre et la demande sur chaque marché. Nous montrons que cet équilibre existe sous des conditions standard lorsque l'ensemble minimal d'incertitude est anticipé par tous les agents. Ce résultat est plus fort que ceux de Radner (1979), Duffie-Shaffer (1985) et De Boisdeffre (2021), qui montrent l'existence générique de l'équilibre en anticipations parfaites. Il est obtenu en appliquant un argument asymptotique à la caractérisation de l'existence de l'équilibre par une condition de non-arbitrage donnée par De Boisdeffre (2007). |
| Keywords: | sequential equilibrium,perfect foresight,existence,rational expectations,financial markets,asymmetric information,arbitrage,équilibre séquentiel,anticipations parfaites,existence de l'équilibre,anticipations rationnelles,marchés financiers,asymétrie d'information |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-03196897&r= |
| By: | Chung, D.; Linton, O.; Whang Y-J. |
| Abstract: | Supermodularity, or complementarity, is a popular concept in economics which can characterize many objective functions, including utility, social welfare, and production functions. Further, supermodular dominance captures a preference for greater interdependence among inputs of those functions, and it can be applied to examine which input set would produce higher expected utility, social welfare, or production. However, contrary to the profuse literature on supermodularity, to the best of our knowledge, there is no existing work on either testing or empirical analysis for supermodular dominance. In this paper, we propose a consistent test for a useful implication of supermodular dominance and suggest a correlation dominance testing for Gaussian random variables as a special case. The test is based on a novel bootstrap critical value, which has potentially enhanced power performance by exploiting the information on the contact set on which the null hypothesis is binding. We also conduct Monte Carlo simulations to explore the finite sample performance of our tests. We then apply our test to analyze two economic questions. We first investigate whether the interdependence of stock returns among major firms has increased after the COVID-19, and find evidence supporting this conjecture. We also compare the interdependence of patent citations depending on distance, where greater interdependence can imply greater expected social welfare effect. The results suggest that, in most cases, between-state citations seem to have greater interdependence than within-state citations, implying that lively interaction between firms across states might engender greater expected social welfare than knowledge spillover within a geographically confined area. |
| Keywords: | Supermodularity, Supermodular Dominance, Stochastic Dominance, Bootstrap, Contact Set, COVID-19, Patent Citation |
| JEL: | C12 C14 |
| Date: | 2021–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2134&r= |