nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒05‒24
25 papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Wishful Thinking in Macroeconomic Expectations By King King Li; Bo Huang
  2. Stochastic Choice: Rational or Erroneous? By Dong, Xueqi; Liu, Shuo Li
  3. Incorporating Social Welfare in Program-Evaluation and Treatment Choice By Debopam Bhattacharya; Tatiana Komarova
  4. The Cross-Section of Household Preferences By Laurent E. Calvet; John Y. Campbell; Francisco Gomes; Paolo Sodini
  5. Optimal Portfolio with Power Utility of Absolute and Relative Wealth By Andrey Sarantsev
  6. Choice Set Confounding in Discrete Choice By Kiran Tomlinson; Johan Ugander; Austin R. Benson
  7. Nonparametric Welfare Analysis for Discrete Choice: Levels and Differences of Individual and Social Welfare By Bart Capéau; Liebrecht De Sadeleer; Sebastiaan Maes; André M.J. Decoster
  8. Estimating Social Preferences Using Stated Satisfaction: Novel Support for Inequity Aversion By Diaz, Lina; Houser, Daniel; Ifcher, John; Zarghamee, Homa
  9. How Optimistic and Pessimistic Narratives about COVID-19 Impact Economic Behavior By Sören Harrs; Lara Marie Müller; Bettina Rockenbach
  10. The Value of a Slender Spouse: Couples Agree that Keeping the Wife Svelte is more Valuable than Keeping the Husband Fit By Kristjana Baldursdottir; Paul McNamee; Edward C. Norton; Tinna Laufey Asgeirsdóttir
  11. Optimal Reinsurance and Investment under Common Shock Dependence Between Financial and Actuarial Markets By Claudia Ceci; Katia Colaneri; Alessandra Cretarola
  12. Auctioning Annuities By Gaurab Aryal; Eduardo Fajnzylber; Maria F. Gabrielli; Manuel Willington
  13. Behavioural Economics, What Have we Missed? Exploring “Classical” Behavioural Economics Roots in AI, Cognitive Psychology, and Complexity Theory By Steve J. Bickley; Benno Torgler
  14. Loss Aversion in Housing Sales Prices: Evidence from Focal Point Bias By Stephen L. Ross; Tingyu Zhou
  15. Prospect Theory and Currency Returns: Empirical Evidence By Kozhan, Roman; Taylor, Mark P; Xu, Qi
  16. Strategic information transmission with sender’sapproval By Renault, Jérôme; Forges, Françoise
  17. Rational Inattention: A Review By Mackowiak, Bartosz Adam; Matejka, Filip; Wiederholt, Mirko
  18. Are CEOs paid extra for riskier pay packages? By Albuquerque, Ana; Albuquerque, Rui; Carter, Mary Ellen; Dong, Flora
  19. Binary Outcomes and Linear Interactions By Boucher, Vincent; Bramoullé, Yann
  20. Dynamic Portfolio Allocation in High Dimensions using Sparse Risk Factors By Bruno P. C. Levy; Hedibert F. Lopes
  21. Rationalizing Rational Expectations: Characterizations and Tests By D'Haultfoeuille, Xavier; Gaillac, Christophe; Maurel, Arnaud
  22. An efficient Monte Carlo method for utility-based pricing By Laurence Carassus; Massinissa Ferhoune
  23. The Ancient Origins of the Wealth of Nations By Ashraf, Quamrul H.; Galor, Oded; Klemp, Marc
  24. Reverse Bayesianism: Revising Beliefs in Light of Unforeseen Events By Becker, Christoph; Melkonyan, Tigran; Proto, Eugenio; Sofianos, Andis; Trautmann, Stefan
  25. Appointed Learning for the Common Good: Optimal Committee Size and Efficient Rewards By Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol

  1. By: King King Li (Shenzhen University); Bo Huang (Chinese University of Hong Kong)
    Abstract: We conduct an online survey experiment to investigate determinants of macroeconomic expectations. We investigate the effect of probability overweighting, religiosity, ambiguity aversion, and time preference. We find that subjects exhibiting probability overweighting, having higher degree of religiosity, having lower discount factor are more optimistic on economic growth and income, while ambiguity averse subjects are more pessimistic about the impact of Covid-19 outbreak on the economic growth rate. We compute the forecast errors and estimate the proportion of forecasts with rounding and implausible values. We find that significant proportion of subjects have rather poor understanding on macroeconomic variables. Subjects with higher degree of religiosity, living in small towns and villages, and with higher subjective socioeconomic status have higher forecast errors, while subjects with better education have lower forecast errors. Overall, we find that subjects form optimistic expectations, supporting the implication of belief-based utility (Brunnermeier and Parker, 2005) and wishful thinking (Seybert and Bloomfield, 2009) on macroeconomic expectations.
    Keywords: Macroeconomic Expectations; Belief-based Utility; Probability Overweighting; Ambiguity Aversion; Time Preference; Religiosity; Experiment
    JEL: C93 D84 E21 E31 E71
    Date: 2021–05–14
  2. By: Dong, Xueqi; Liu, Shuo Li
    Abstract: Likelihood functions have been the central pieces of statistical inference. For discrete choice data, conventional likelihood functions are specified by random utility(RU) models, such as logit and tremble, which generate choice stochasticity through an ”error”, or, equivalently, random preference.For risky discrete choice, this paper explores an alternative method to construct the likelihood function: Rational Expectation Stochastic Choice (RESC). In line with Machina (1985), the subject optimally and deterministically chooses a stochastic choice function among all possible stochastic choice functions; the choice stochasticity canbe explained by risk aversion and the relaxation of the reduction of compound lottery. The model maximizes a simple two-layer expectation that disentangles risk and randomization, in the similar spirit of Klibanoff et al. (2005) where ambiguity and risk are disentangled. The model is applied to an experiment, where we do not commit to a particular stochastic choice function but let the data speak. In RESC, well-developed decision analysis methods to measure risk attitude toward objective probability can also be ap-plied to measure the attitude toward the implied choice probability. Stochastic choicefunctions are structurally estimated to estimate the stochastic choice functions, anduse standard discrimination test to compare the goodness of fit of RESC and differentRUs. The RUs are Expected Utility+logit and other leading contenders for describing decision under risk. The results suggest the statistical superiority of RESC over ”error” rules. With weakly fewer parameters, RESC outperforms different benchmarkRU models for 30%−89% of subjects. RU models outperform RESC for 0%−2% of subjects. Similar statistical superiority is replicated in a second set of experimental data.
    Keywords: Experiment; Likelihood Function; Maximum Likelihood Identification;Risk Aversion Parameter; Clarke Test; Discrimination of Stochastic Choice Functions
    JEL: D8
    Date: 2019–12
  3. By: Debopam Bhattacharya; Tatiana Komarova
    Abstract: The econometric literature on program-evaluation and optimal treatment-choice takes functionals of outcome-distributions as target welfare, and ignores program-impacts on unobserved utilities, including utilities of those whose outcomes may be unaffected by the intervention. We show that in the practically important setting of discrete-choice, under general preference-heterogeneity and income-effects, the distribution of indirect-utility is nonparametrically identified from average demand. This enables cost-benefit analysis and treatment-targeting based on social welfare and planners' distributional preferences, while also allowing for general unobserved heterogeneity in individual preferences. We demonstrate theoretical connections between utilitarian social welfare and Hicksian compensation. An empirical application illustrates our results.
    Date: 2021–05
  4. By: Laurent E. Calvet; John Y. Campbell; Francisco Gomes; Paolo Sodini
    Abstract: This paper estimates the cross-sectional distribution of Epstein-Zin preference parameters in a large administrative panel of Swedish households. We consider life-cycle model of saving and portfolio choice that incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged stock-owning households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. We find some heterogeneity in risk aversion (a standard deviation of 0.47 around a mean of 5.24 and median of 5.30) and considerable heterogeneity in the time preference rate (standard deviation 6.0% around a mean of 6.2% and median of 4.1%) and elasticity of intertemporal substitution (standard deviation 0.96 around a mean of 0.99 and median of 0.42). Risk aversion and the EIS are almost cross-sectionally uncorrelated, in contrast with the strong negative correlation that we would find if households had power utility with heterogeneous risk aversion. The TPR is weakly negatively correlated with both the other parameters. We estimate lower risk aversion for households with riskier labor income and higher levels of education, and a higher TPR and lower EIS for households who enter our sample with low initial wealth.
    JEL: E21 G51
    Date: 2021–05
  5. By: Andrey Sarantsev
    Abstract: Portfolio managers often evaluate performance relative to benchmark, usually taken to be the Standard & Poor 500 stock index fund. This relative portfolio wealth is defined as the absolute portfolio wealth divided by wealth from investing in the benchmark (including reinvested dividends). The classic Merton problem for portfolio optimization considers absolute portfolio wealth. We combine absolute and relative wealth in our new utility function. We also consider the case of multiple benchmarks. To both absolute and relative wealth, we apply power utility functions, possibly with different exponents. We obtain an explicit solution and compare it to the classic Merton solution. We apply our results to the Capital Asset Pricing Model setting.
    Date: 2021–05
  6. By: Kiran Tomlinson; Johan Ugander; Austin R. Benson
    Abstract: Standard methods in preference learning involve estimating the parameters of discrete choice models from data of selections (choices) made by individuals from a discrete set of alternatives (the choice set). While there are many models for individual preferences, existing learning methods overlook how choice set assignment affects the data. Often, the choice set itself is influenced by an individual's preferences; for instance, a consumer choosing a product from an online retailer is often presented with options from a recommender system that depend on information about the consumer's preferences. Ignoring these assignment mechanisms can mislead choice models into making biased estimates of preferences, a phenomenon that we call choice set confounding; we demonstrate the presence of such confounding in widely-used choice datasets. To address this issue, we adapt methods from causal inference to the discrete choice setting. We use covariates of the chooser for inverse probability weighting and/or regression controls, accurately recovering individual preferences in the presence of choice set confounding under certain assumptions. When such covariates are unavailable or inadequate, we develop methods that take advantage of structured choice set assignment to improve prediction. We demonstrate the effectiveness of our methods on real-world choice data, showing, for example, that accounting for choice set confounding makes choices observed in hotel booking and commute transportation more consistent with rational utility-maximization.
    Date: 2021–05
  7. By: Bart Capéau; Liebrecht De Sadeleer; Sebastiaan Maes; André M.J. Decoster
    Abstract: Empirical welfare analyses often impose stringent parametric assumptions on individuals’ preferences and neglect unobserved preference heterogeneity. In this paper, we develop a framework to conduct individual and social welfare analysis for discrete choice that does not suffer from these drawbacks. We first adapt the broad class of individual welfare measures introduced by Fleurbaey (2009) to settings where individual choice is discrete. Allowing for unrestricted, unobserved preference heterogeneity, these measures become random variables. We then show that the distribution of these objects can be derived from choice probabilities, which can be estimated nonparametrically from cross-sectional data. In addition, we derive nonparametric results for the joint distribution of welfare and welfare differences, as well as for social welfare. The former is an important tool in determining whether those who benefit from a price change belong disproportionately to those who were initially well-off. An empirical application illustrates the methods.
    Keywords: discrete choice, nonparametric welfare analysis, individual welfare, social welfare, money metric utility, compensating variation, equivalent variation
    JEL: C14 C35 D12 D63 H22 I31
    Date: 2021
  8. By: Diaz, Lina (George Mason University); Houser, Daniel (George Mason University); Ifcher, John (Santa Clara University); Zarghamee, Homa (Barnard College)
    Abstract: In this paper, we use stated satisfaction to estimate social preferences: subjects report their satisfaction with payment-profiles that hold their own payment constant while varying another subject's payment. This approach yields significant support for the inequity aversion model of Fehr and Schmidt (1999). This model is among the most renowned in behavioral economics, positing a generalized aversion to inequality that is stronger when one's own payoff is lower–rather than higher–than others'; i.e., "envy" is stronger than "guilt." While aggregate-level estimates based on revealed preferences in laboratory games have supported the model, the assumption that guilt is stronger than envy is often violated at the individual level. This paradox may be due to limitations of the revealed-preference approach. An advantage of avoiding games is that eliciting stated satisfaction is relatively easy to implement and is less prone to being confounded with motives like reciprocity; also the absence of tradeoffs between own and others' payoffs is cognitively less demanding for subjects. Our unstructured approach does not limit the expression of social preferences to inequity aversion, yet our methodology yields significant support for it. At the individual level, 86% of subjects exhibit at least as strong envy as guilt, and 76% (65%) of subjects weakly (strongly) adhere to the model. Our individual-level estimates are robust to changing the value of one's own constant payment and to changing the range of the other subject's payments. Methodologically, eliciting satisfaction can be an easy-to-implement complement to choice-based preference-measures in contexts other than social preferences that are of interest to economists.
    Keywords: inequity aversion, social preferences, stated satisfaction, laboratory experiment
    JEL: C91 D31 D63 I31
    Date: 2021–04
  9. By: Sören Harrs (Department of Economics, University of Cologne); Lara Marie Müller (Department of Economics, University of Cologne); Bettina Rockenbach (Department of Economics, University of Cologne and Max Planck Institute for Research on Collective Goods)
    Abstract: Politicians, scientists and journalists have aired vastly different assessments of the COVID-19 pandemic, ranging from rather optimistic to very pessimistic ones. In this paper we investigate how narratives conveying different assessments of the pandemic impact economic behavior. In a controlled experiment with incentivized economic games we find that subjects behave more risk averse and less patiently when confronted with a pessimistic compared to an optimistic or balanced narrative. Further we find that narratives change subjects’ expectations about the pandemic and the stock market. Hence our experiment provides causal evidence for an impact of narratives on fundamental determinants of household behavior.
    Keywords: Narrative Economics, Risk Aversion, Patience, Expectations
    JEL: D80 D91 E71 G41
    Date: 2021–05
  10. By: Kristjana Baldursdottir; Paul McNamee; Edward C. Norton; Tinna Laufey Asgeirsdóttir
    Abstract: According to the World Health Organization, obesity is one of the greatest public-health challenges of the 21st century. Body weight is also known to affect individuals’ self-esteem and interpersonal relationships, including romantic ones. We estimate “utility-maximizing” Body Mass Index (BMI) and calculate the implied monetary value of changes in both individual and spousal BMI, using the compensating income variation method and data from the Swiss Household Panel. Two-stage least squares models are estimated for women and men separately, with mother’s education as an instrument to account for the potential endogeneity in income. Results suggest that the optimal own BMI is 27.4 and 22.7 for men and women, respectively. The annual value of reaching optimal weight ranges from $3,235 for underweight women to $32,378 for obese women and from $19,088 for underweight men to $43,175 for obese men. Women on average value changes in their own BMI about three times higher than changes in their spouse’s BMI. Men, on the other hand, value a reduction in their spouse’s BMI almost twice as much compared to a reduction in their own BMI. Married couples therefore agree on one thing, that keeping the wife svelte is even more valuable than keeping the husband fit.
    JEL: I12 I14 I18 I31
    Date: 2021–05
  11. By: Claudia Ceci; Katia Colaneri; Alessandra Cretarola
    Abstract: We study optimal proportional reinsurance and investment strategies for an insurance company which experiences both ordinary and catastrophic claims and wishes to maximize the expected exponential utility of its terminal wealth. We propose a model where the insurance framework is affected by environmental factors, and aggregate claims and stock prices are subject to common shocks, i.e. drastic events such as earthquakes, extreme weather conditions, or even pandemics, that have an immediate impact on the financial market and simultaneously induce insurance claims. Using the classical stochastic control approach based on the Hamilton-Jacobi-Bellman equation, we provide a verification result for the value function via classical solutions to two backward partial differential equations and characterize the optimal reinsurance and investment strategies. Finally, we make a comparison analysis to discuss the effect of common shock dependence.
    Date: 2021–05
  12. By: Gaurab Aryal (University of Virginia); Eduardo Fajnzylber (Universidad Adolfo Ibáñez); Maria F. Gabrielli (Universidad del Desarrollo/CONICET); Manuel Willington (Universidad Adolfo Ibáñez)
    Abstract: We use data on annuities to study and evaluate an imperfectly competitive market where firms have private information about their (annuitization) costs. Our data is from Chile, where the market is structured as first-price-auction-followed-by-bargaining, and where each retiree chooses a firm and an annuity contract to maximize her expected present discounted utility. We find that retirees with low savings have the highest in- formation processing cost, and they also care about firms' risk-ratings the most. Furthermore, while almost 50% of retirees reveal that they do not value leaving bequests, the rest have heterogeneous preference for bequest that, on average, increases with their savings. On the supply side, we find that firms' annuitization costs vary across retirees, and the average costs increase with retirees’ savings. If these costs were commonly known then the pensions would increase for everyone, but the increment would be substantial only for the high savers. Likewise, if we simplify the current pricing mechanism by implementing English auctions and "shutting down" the risk-ratings, then the pensions would increase, but again, mostly for the high savers.
    Keywords: Annuity Auctions Mortality Annuitization Costs
    JEL: D14 D44 D91 C57 J26 L13
    Date: 2020–11
  13. By: Steve J. Bickley; Benno Torgler
    Abstract: In this chapter, we ask (conceptually and methodologically) what exactly is behavioural economics and what are its roots? And further, what may we have missed along the way? We argue that revisiting “classical” behavioural economics concepts and methods will benefit the wider behavioural economics program by questioning its yardstick approach to ‘Olympian’ rationality and optimisation and in doing so, exploring the ‘how’ and ‘why’ of economic behaviours (micro, meso, and macro) in greater detail and clarity. We also do the same for fields which share similar ontological and epistemological roots with “classical” behavioural economics. In particular, cognitive psychology, complexity theory, and artificial intelligence. By engaging in debate and investing thought into multiple layers of the ontology-epistemology- methodology, we look to engage in ‘deeper’ (and potentially more profound) scientific discussions. We also explore the utility and implications of mixed methods in behavioural economics research, policy, and practice.
    Keywords: Behavioural Economics; Cognitive Psychology; Complexity Theory; Artificial Intelligence
    Date: 2021–05
  14. By: Stephen L. Ross; Tingyu Zhou
    Abstract: Estimates of loss aversion in housing sales prices may be biased because expected losses correlate with housing and borrower unobservables. We provide new evidence of loss aversion in sales price by differencing loss aversion estimates between sellers who exhibit focal point bias in their initial mortgage amount and those who do not. Although focal point bias and loss aversion are associated with different families of behaviors, recent evidence suggests links between these biases. Revisiting experimental data, subjects with high levels of loss aversion were more likely to use round numbers. Using housing data, estimates of loss aversion are 10 percentage points higher for sellers with round number mortgage amounts as a share of expected loss. Differences in expected loss are balanced over both housing and mortgage attributes, are stable as additional of controls are added, and are robust to using a discontinuity style regression centered on mortgage amounts of round numbers. On the other hand, traditional estimates of loss aversion fall by as much as 73 percent as additional controls are added. This study provides unique evidence that loss aversion and focal point bias are found together, and presents new, more robust evidence that loss aversion influences housing sales prices.
    JEL: D91 G21 R21 R31
    Date: 2021–05
  15. By: Kozhan, Roman; Taylor, Mark P; Xu, Qi
    Abstract: We empirically investigate the role of prospect theory in the foreign exchange market. Using the historical distribution of exchange rate changes, we construct a currency-level measure of prospect theory value and find that it negatively forecasts future currency excess returns. High prospect theory value currencies significantly underperform low prospect theory value currencies. The predictability is higher when arbitrage is limited and during periods of excess speculative demand of ir- rational traders. These findings are consistent with the hypothesis that investors mentally represent currencies by their historical distributions or charts and evaluate the distribution in the way described by prospect theory.
    Keywords: currency returns; foreign exchange; Limits to Arbitrage; prospect theory
    JEL: F31 G12 G15 G40
    Date: 2020–09
  16. By: Renault, Jérôme; Forges, Françoise
    Abstract: We consider a sender-receiver game with an outside option for the sender. After the cheap talk phase, the receiver makes a proposal to the sender, which the latter can reject. We study situations in which the sender’s approval is crucial to the receiver. We show that a partitional, (perfect Bayesian Nash) equilibrium exists if the sender has only two types or if the receiver’s preferences over decisions do not depend on the type of the sender as long as the latter participates. The result does not extend: we construct a counter-example (with three types for the sender and type-dependent affine utility functions) in which there is no mixed equilibrium. In the three type case, we provide a full characterization of (possibly mediated) equilibria.
    JEL: C7 C72 C78 C
    Date: 2021–05
  17. By: Mackowiak, Bartosz Adam; Matejka, Filip; Wiederholt, Mirko
    Abstract: We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to attend to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model.
    Keywords: Information Choice; rational inattention
    JEL: D8
    Date: 2020–10
  18. By: Albuquerque, Ana; Albuquerque, Rui; Carter, Mary Ellen; Dong, Flora
    Abstract: This paper quantifies the cost of CEO incentive compensation by estimating an elasticity of pay to the variance of pay. This metric is based on the benchmark moral hazard model widely used to study CEO pay. Using US CEO compensation data and a variety of empirical approaches, we find that CEOs with riskier pay packages are paid more. However, the estimated elasticity of pay to the variance of pay is small. This small elasticity implies a low risk aversion coefficient for CEOs and a risk premium that is at most 12% of total pay. This risk premium is about evenly split between compensation for risk in cash bonus, stock grants, and option grants. Overall, our findings suggest that incentive pay is not too costly for firms from a risk-diversification perspective, which may explain the heavy reliance on incentive pay by US firms, and cast doubt on the ability of the benchmark moral hazard model to explain CEO pay in the US.
    Keywords: ARCH; CEO pay; Contract Theory; Incentive Lab; incentives; moral hazard; participation constraint; realized variance; risk aversion
    JEL: D81 G30 J33 M52
    Date: 2020–09
  19. By: Boucher, Vincent; Bramoullé, Yann
    Abstract: Heckman and MaCurdy (1985) first showed that binary outcomes are compatible with linear econometric models of interactions. This key insight was unduly discarded by the literature on the econometrics of games. We consider general models of linear interactions in binary outcomes that nest linear models of peer effects in networks and linear models of entry games. We characterize when these models are well defined. Errors must have a specific discrete structure. We then analyze the models' game-theoretic microfoundations. Under complete information and linear utilities, we characterize the preference shocks under which the linear model of interactions forms a Nash equilibrium of the game. Under incomplete information and independence, we show that the linear model of interactions forms a Bayes-Nash equilibrium if and only if preference shocks are iid and uniformly distributed. We also obtain conditions for uniqueness. Finally, we propose two simple consistent estimators. We revisit the empirical analyses of teenage smoking and peer effects of Lee, Li, and Lin (2014) and of entry into airline markets of Ciliberto and Tamer (2009). Our reanalyses showcase the main interests of the linear framework and suggest that the estimations in these two studies suffer from endogeneity problems.
    Keywords: Binary Outcomes; Econometrics of Games; Linear Probability Model; peer effects
    Date: 2020–11
  20. By: Bruno P. C. Levy; Hedibert F. Lopes
    Abstract: We propose a fast and flexible method to scale multivariate return volatility predictions up to high-dimensions using a dynamic risk factor model. Our approach increases parsimony via time-varying sparsity on factor loadings and is able to sequentially learn the use of constant or time-varying parameters and volatilities. We show in a dynamic portfolio allocation problem with 455 stocks from the S&P 500 index that our dynamic risk factor model is able to produce more stable and sparse predictions, achieving not just considerable portfolio performance improvements but also higher utility gains for the mean-variance investor compared to the traditional Wishart benchmark and the passive investment on the market index.
    Date: 2021–05
  21. By: D'Haultfoeuille, Xavier; Gaillac, Christophe; Maurel, Arnaud
    Abstract: In this paper, we build a new test of rational expectations based on the marginal distributions of realizations and subjective beliefs. This test is widely applicable, including in the common situation where realizations and beliefs are observed in two dierent datasets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribu- tion of realizations being a mean-preserving spread of the distribution of beliefs. The null hypothesis can then be rewritten as a system of many moment inequal- ity and equality constraints, for which tests have been recently developed in the literature. The test is robust to measurement errors under some restrictions and can be extended to account for aggregate shocks. Finally, we apply our methodology to test for rational expectations about future earnings. While individuals tend to be right on average about their future earnings, our test strongly rejects rational expectations.
    Keywords: Rational expectations; Test; Subjective expectations; Data; combination.
    Date: 2021–05
  22. By: Laurence Carassus; Massinissa Ferhoune
    Abstract: We propose an efficient numerical method, based on the Lambert function, for the computation and study of the reservation price as well as the value function in the case of illiquidity. Our theoretical results are illustrated by numerical simulations.
    Date: 2021–05
  23. By: Ashraf, Quamrul H.; Galor, Oded; Klemp, Marc
    Abstract: This essay explores the deepest roots of economic development. It underscores the significance of evolutionary processes in shaping fundamental individual and cultural traits, such as time preference, risk and loss aversion, and predisposition towards child quality, that have contributed to technological progress, human-capital formation, and economic development. Moreover, it highlights the persistent mark of the exodus of Homo sapiens from Africa tens of thousands of years ago on the degree of interpersonal population diversity across the globe and examines the impact of this variation in diversity for comparative economic, cultural, and institutional development across countries, regions, and ethnic groups.
    Keywords: Comparative development; entrepreneurial spirit; human evolution; interpersonal diversity; loss aversion; natural selection; preference for child quality; the; Time Preference
    JEL: N10 N30 O11 Z10
    Date: 2020–10
  24. By: Becker, Christoph; Melkonyan, Tigran; Proto, Eugenio; Sofianos, Andis; Trautmann, Stefan
    Abstract: Bayesian Updating is the dominant theory of learning in economics. The theory is silent about how individuals react to events that were previously unforeseeable or unforeseen. Recent theoretical literature has put forth axiomatic frameworks to analyze the unknown. In particular, we test if subjects update their beliefs in a way that is consistent reverse Bayesian, which ensures that the old information is used correctly after an unforeseen event materializes. We find that participants do not systematically deviate from reverse Bayesianism, but they do not seem to expect an unknown event when this is reasonably unforeseeable, in two pre-registered experiments that entail unforeseen events. We argue that participants deviate less from the reverse Bayesian updating than from the usual Bayesian updating. We provide further evidence on the moderators of belief updating.
    Keywords: Bayesian updating; Reverse Bayesianism; Unawareness; Unforeseen
    Date: 2020–11
  25. By: Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol
    Abstract: A population of identical individuals must choose one of two alternatives under uncertainty about what the right alternative is. Individuals can gather information of increasing accuracy at an increasing convex utility cost. For such a setup, we analyze how vote delegation to a committee and suitable monetary transfers for its members can ensure that high or optimal levels of information are (jointly) acquired. Our main insight is that to maximize the probability of choosing the right alternative committee size must be small, no matter whether information acquisition costs are private or not. Our analysis and results cover two polar cases--information costs are either private or public--and unravel both the potential and the limitations of monetary transfers in committee design.
    Keywords: Voting - Committee - Cost sharing - Information acquisition - Reward scheme - Monetary transfers - Majority rule
    JEL: C72 D71 D8
    Date: 2020–09

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