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on Utility Models and Prospect Theory |
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Issue of 2021‒06‒21
seventeen papers chosen by |
| By: | Cécile Aubert (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Emmanuelle Augeraud-Véron (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Lockdown curbs the COVID-19 epidemics but at huge costs. Public debates question its impact compared to reliance on individual responsibility. We study how rationally chosen self-protective behavior impacts the spread of the epidemics and interacts with policies. We first assess the value of lockdown in terms of mortality compared to a counterfactual scenario that incorporates self-protection efforts; and second, assess how individual behavior modify the epidemic dynamics when public regulations change. We couple an SLIAR model, that includes asymptomatic transmission, with utility maximization: Individuals trade off economic and wellbeing costs from physical distancing with a lower infection risk. Physical distancing effort depends on risk aversion, perceptions of the epidemics and average distancing effort in the population. Rational distancing effort is computed as a Nash Equilibrium. Equilibrium effort differs markedly from constant, stochastic or proportional contacts reduction. It adjusts to daily incidence of hospitalization in a way that creates a slightly decreasing plateau in epidemic prevalence. Calibration on French data shows that a business-as-usual benchmark yields an overestimation of the number of deaths by a factor of 10 compared to benchmarks with equilibrium efforts. However, lockdown saves nearly twice as many lives as individual efforts alone. Public policies post-lockdown have a limited impact as they partly crowd out individual efforts. Communication that increases risk salience is more effective. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03239997&r= |
| By: | Nobuo Koida (Faculty of Policy Studies, Iwate Prefectural University) |
| Abstract: | Much of the literature has argued that intransitive indifference is more likely to occur when alternatives have con icting criteria than when one alternative dominates the other. To study such a phenomenon, we first axiomatize the essentially unique expected utility with direction-dependent sensitivity (EUDS) representation on the set of lotteries which extend the classic models of imperfect discrimination (e.g., Fishburn, 1970a; Luce, 1956) to enable a direction-dependent just-noticeable di erence function. The key axioms in this characterization are irresolute independence, wherein mixing lternatives with another may (or may not) alter a strict preference for indifference while preserving indifference, and strict preference convexity, which obtains the convexity of strict upper and lower contour sets. Thereafter, we indicate that intransitive indifference in EUDS can be divided into that caused by imperfect discrimination (Fishburn, 1970a; Luce, 1956) and that caused by uncertainty about tastes (Dubra et al., 2004) by considering the transitive core (Nishimura, 2018) of EUDS. We also obtain two special cases of our model, i.e., one-directional and categorical sensitivity. |
| Keywords: | intransitive indifference, direction-dependence, incomplete preference, transitive core |
| JEL: | D81 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1061&r= |
| By: | Juan M. Londono; Nancy R. Xu |
| Abstract: | We examine the commonality in international equity risk premiums by linking empirical evidence for the international stock return predictability of US downside and upside variance risk premiums (DVP and UVP, respectively) with implications from an international asset pricing framework, which takes the perspective of a US/global investor and features asymmetric global macroeconomic, financial market, and risk aversion shocks. We find that DVP and UVP predict international stock returns through different global equity risk premium determinants: bad and good macroeconomic uncertainties, respectively. Across countries, US investors demand lower macroeconomic risk compensation but higher financial market risk compensation for more-integrated countries. |
| Keywords: | Downside variance risk premium; Upside variance risk premium; International stock markets; Asymmetric state variables; Stock return predictability |
| JEL: | F36 G12 G13 G15 |
| Date: | 2021–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1318&r= |
| By: | Hellwig, Christian |
| Abstract: | I analyze dynamic Mirrlees taxation with preferences that are non-separable between con- sumption, leisure and type, which determines both ability and consumption needs. I show how to account for non-separable preferences through a simple change in probability measures. I ge- neralize the existing Inverse Euler Equation and optimal static labor tax formulae and provide a unied intuition based on a set of perturbations around the optimal allocations that preserve expected utility and incentive compatibility. Non-separability in preferences gives rise to a new tradeo between current and future redistribution that is internalized by the planner's solution but not by private savings decisions. This leads to a novel rationale to subsidize (tax) savings and make labor taxes more (less) persistent, when more productive agents also have higher (lower) consumption needs. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:125745&r= |
| By: | Baldwin, Elizabeth; Edhan, Omer; Jagadeesan, Ravi; Klemperer, Paul; Teytelboym, Alex |
| Abstract: | We show that, with indivisible goods, the existence of competitive equilibrium fundamentally depends on agents' substitution effects, not their income effects. Our Equilibrium Existence Duality allows us to transport results on the existence of competitive equilibrium from settings with transferable utility to settings with income effects. One consequence is that net substitutability-which is a strictly weaker condition than gross substitutability-is sufficient for the existence of competitive equilibrium. We also extend the "demand types" classification of valuations to settings with income effects and give necessary and sufficient conditions for a pattern of substitution effects to guarantee the existence of competitive equilibrium. |
| JEL: | C62 D11 D44 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14926&r= |
| By: | Buckley, P.; Roussillon, B.; Teyssier, S. |
| Abstract: | In this paper we compare the impact of a gain framing with a loss framing on a simple and repetitive task. Based on the expectation of higher reference points in the loss framing than in the gain framing, we expected to generate higher effort in the former. Instead, we find no evidence of loss framing effect on participants’ efforts over the experiment. Our results suggest that time pressure on a task kills the loss framing effect. However, experimental sessions without time pressure confirm that the potential effect of loss framing as a nudge is minimal in our context. Nowadays where nudges seem to be the king way for changing behavior we find that monetary incentives are still very powerful to incentive behaviour especially with students. |
| Keywords: | FRAMING EFFECTS;LOSS AVERSION;PROSPECT THEORY;REFERENCE DEPENDENCE;RISK AVERSION |
| JEL: | C91 D91 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2021-02&r= |
| By: | Azim Shariff (Unknown); Jean-François Bonnefon (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Iyad Rahwan (Unknown) |
| Abstract: | Autonomous Vehicles (AVs) promise of a multi-trillion-dollar industry that revolutionizes transportation safety and convenience depends as much on overcoming the psychological barriers to their widespread use as the technological and legal challenges. The first AV-related traffic fatalities have pushed manufacturers and regulators towards decisions about how mature AV technology should be before the cars are rolled out in large numbers. We discuss the psychological factors underlying the question of how safe AVs need to be to compel consumers away from relying on the abilities of human drivers. For consumers, how safe is safe enough? Three preregistered studies (N = 4,566) reveal that the established psychological biases of algorithm aversion and the better-than-average effect leave consumers averse to adopting AVs unless the cars meet extremely potentially unrealistically high safety standards. Moreover, these biases prove stubbornly hard to overcome, and risk substantially delaying the adoption of life-saving autonomous driving technology. We end by proposing that, from a psychological perspective, the emphasis AV advocates have put on safety may be misplaced. |
| Keywords: | autonomous vehicles,automation,algorithm aversion,safety,illusory superiority |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03236635&r= |
| By: | Sémirat, S.; Forges, F. |
| Abstract: | We consider a sender-receiver game, in which the sender has finitely many types and the receiver's decision is a real number. We assume that utility functions are concave, single-peaked and single-crossing. After the cheap talk phase, the receiver makes a decision, which requires the sender's approval to be implemented. Otherwise, the sender "exits". At a perfect Bayesian equilibrium without exit, the receiver must maximize his expected utility subject to the participation constraints of all positive probability types. This necessary condition may not hold at the receiver's prior belief, so that a non-revealing equilibrium may fail to exist. Similarly, a fully revealing equilibrium may not exist either due to the sender's incentive compatibility conditions. We propose a constructive algorithm that always achieves a perfect Bayesian equilibrium without exit. |
| Keywords: | APPROVAL;CHEAP TALK;SENDER-RECEIVER GAME;PARTICIPATION CONSTRAINTS;SINGLE-CROSSING |
| JEL: | C72 D82 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2021-03&r= |
| By: | Zhengqing Zhou; Guanyang Wang; Jose Blanchet; Peter W. Glynn |
| Abstract: | We propose a new unbiased estimator for estimating the utility of the optimal stopping problem. The MUSE, short for `Multilevel Unbiased Stopping Estimator', constructs the unbiased Multilevel Monte Carlo (MLMC) estimator at every stage of the optimal stopping problem in a backward recursive way. In contrast to traditional sequential methods, the MUSE can be implemented in parallel when multiple processors are available. We prove the MUSE has finite variance, finite computational complexity, and achieves $\varepsilon$-accuracy with $O(1/\varepsilon^2)$ computational cost under mild conditions. We demonstrate MUSE empirically in several numerical examples, including an option pricing problem with high-dimensional inputs, which illustrates the use of the MUSE on computer clusters. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.02263&r= |
| By: | Ruimeng Hu; Thaleia Zariphopoulou |
| Abstract: | The paper introduces and analyzes $N$-player and common-noise mean-field games in It\^{o}-diffusion environments, in the context of both complete and incomplete financial markets. The players invest in a finite horizon and in a common market by either competitive or homophilous interactions. In both kinds of market environments, the players have individual risk tolerance coefficients. In the incomplete market setting, these risk tolerances are constants (CARA utilities), while in the complete market, they are assumed to be wealth-independent random variables depending, among others, on upcoming market information. For all these distinct models, we derive explicit or closed-form solutions for the optimal policies and optimal wealth processes, as well as for the related game values. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.00581&r= |
| By: | Steven Diamond; Stephen Boyd; David Greenberg; Mykel Kochenderfer; Andrew Ang |
| Abstract: | Using a lifecycle framework with Epstein-Zin (1989) utility and a mixed-integer optimization approach, we compute the optimal age to claim Social Security benefits. Taking advantage of homogeneity, a sufficient statistic is the ratio of wealth to the primary insurance amount (PIA). If the investor's wealth to PIA ratio exceeds a certain threshold, individuals should defer Social Security for at least a year. The optimal threshold depends on mortality assumptions and an individual's utility preferences, but is less sensitive to capital market assumptions. The threshold wealth to PIA ratio increases from 5.5 for men and 5.2 for women at age 62 to 11.1 for men and 10.4 for women at age 69. Below the threshold wealth to PIA ratio, individuals claim Social Security to raise consumption. Above this level, investors can afford to fund consumption out of wealth for at least one year, and then claim a higher benefit. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.00125&r= |
| By: | Yuan Deng; Jieming Mao; Balasubramanian Sivan; Kangning Wang |
| Abstract: | A patient seller aims to sell a good to an impatient buyer (i.e., one who discounts utility over time). The buyer will remain in the market for a period of time $T$, and her private value is drawn from a publicly known distribution. What is the revenue-optimal pricing-curve (sequence of (price, time) pairs) for the seller? Is randomization of help here? Is the revenue-optimal pricing-curve computable in polynomial time? We answer these questions in this paper. We give an efficient algorithm for computing the revenue-optimal pricing curve. We show that pricing curves, that post a price at each point of time and let the buyer pick her utility maximizing time to buy, are revenue-optimal among a much broader class of sequential lottery mechanisms: namely, mechanisms that allow the seller to post a menu of lotteries at each point of time cannot get any higher revenue than pricing curves. We also show that the even broader class of mechanisms that allow the menu of lotteries to be adaptively set, can earn strictly higher revenue than that of pricing curves, and the revenue gap can be as big as the support size of the buyer's value distribution. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2106.02149&r= |
| By: | Victor Olkhov |
| Abstract: | We make three remarks to the main CAPM equation presented in the well-known textbook by John Cochrane (2001). First, we believe that any economic averaging procedure implies aggregation of corresponding time series during certain time interval ${\Delta}$ and explain the necessity to use math expectation for both sides of the main CAPM equation. Second, the first-order condition of utility max used to derive main CAPM equation should be complemented by the second one that requires negative utility second derivative. Both define the amount of assets ${\xi}_{max}$ that delivers max to utility. Expansions of the utility in a Taylor series by price and payoff variations give approximations for ${\xi}_{max}$ and uncover equations on price, payoff, volatility, skewness, their covariance's and etc. We discuss why market price-volume positive correlations may prohibit existence of ${\xi}_{max}$ and main CAPM equation. Third, we argue that the economic sense of the conventional frequency-based price probability may be poor. To overcome this trouble we propose new price probability measure based on widely used volume weighted average price (VWAP). To forecast price volatility one should predict evolution of squares of the value and the volume of market trades aggregated during averaging interval ${\Delta}$. The forecast of the new price probability measure may be the main tough puzzle for CAPM and finance. However investors are free to chose any probability measure they prefer as ground for their investment strategies but should be ready for unexpected losses due to possible distinctions with real market trade price dynamics. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.13903&r= |
| By: | Calvet, Laurent; Célérier, Claire; Sodini, Paolo; Vallee, Boris |
| Abstract: | This paper shows that securities with a non-linear payoff design can foster household risk-taking. We demonstrate this effect empirically by exploiting the introduction of capital guarantee products in Sweden from 2002 to 2007. The fast and broad adoption of these products is associated with an increase in expected financial portfolio returns, which is especially strong for households with a low risk appetite ex ante. We explore possible economic explanations by developing a life-cycle model of consumption-portfolio decisions. The capital guarantee substantially increases risk-taking by households with pessimistic beliefs or preferences combining loss aversion and narrow framing. The welfare gains from financial innovation are stronger for households that are less willing to take risk ex ante. Our results illustrate how security design can mitigate behavioral biases and enhance economic well-being. |
| Keywords: | behavioral biases; capital guarantee product; household finance; risk-taking; security design |
| JEL: | D12 D18 G1 I22 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14955&r= |
| By: | Howard, Greg |
| Abstract: | Models of rational inattention allow agents to make mistakes in their actions while assuming they do not make mistakes in attention allocation. I test this assumption by comparing attention’s marginal benefit (better actions) and marginal cost (less time for future decisions) using millions of online chess moves. I cannot reject that skilled players equalize marginal benefit and marginal cost across different time controls. Bad players, when they have little time, under-adjust their attention allocation, leading them to have higher marginal cost. A simple intervention improves players' attention allocation. |
| Keywords: | rational inattention, deterministic games, cognitive costs |
| JEL: | C72 D83 D91 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108243&r= |
| By: | Gruener, Sven; Lehberger, Mira; Hirschauer, Norbert; Mußhoff, Oliver |
| Abstract: | This paper analyzes whether there is a gap between agricultural students’ and non-students’ (farmers’) behaviors in economic experiments which are often used to measure risk aversion, impatience, positive reciprocity, negative reciprocity, altruism, and trust. A further question is whether monetary incentives matter in this respect. We use the Holt and Laury procedure (2002) to elicit risk aversion, the procedure according to Laury et al. (2012) to measure impatience, a gift exchange game (Charness et al. 2004) to capture positive reciprocity, an ultimatum bargaining game (Güth et al. 1982) to assess negative reciprocity, a dictator experiment (Engel 2011) to gauge altruism, and a trust game (Kosfeld et al. 2005) to assess trust in others. We find no differences between agricultural students and farmers in their risk aversion, whereas the latter are fund to be considerably more impatient than the former. Positive and negative reciprocity is slightly more pronounced with farmers. Findings regarding altruism in the two groups are mixed and trust is somewhat more pronounced with farmers. The paper challenges approaches that assume that students can be used as standard experimental subjects whose behaviors can be generalized towards other populations. |
| Date: | 2021–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:psda5&r= |
| By: | Clive L. Spash; Tone Smith |
| Abstract: | The values of Nature are today ever more contested in attempts to reduce them to a narrow economics calculus and financial metrics. The crisis of modernity is evident is that the concept of Nature itself has been subject to post-modern deconstruction as archaic Romanticism while simultaneously being made into a modernist capital form by economists, bankers and financiers. In this paper we start by defining the meaning of Nature before moving to its values, the two being inseparable. Nature is seen as combining three aspect: (i) being ‘other’ than human, (ii) a biophysical structure and (iii) a quality which humans commonly and intuitively reference but struggle to specify. When turning to the values of Nature we describe the three major meta-ethical systems of Western philosophy—utilitarianism, deontology and virtue ethics. The contestation especially between utilitarian and rights-based approaches is explored. The role of intrinsic value in these systems is outlined. Modern mainstream economic valuation is then placed in context of the forgoing discussion and critically reviewed as a misguided but hegemonic approach to valuing Nature. The terrain of debate is laid out, briefly covering recent developments of rights to Nature and Nature’s contribution to people. That Nature cannot be dismissed as a concept (something attempted by some post-modernists and strong constructionists), but remains importantly contested in terms of its values, is central to understanding the on-going social-ecological conflicts created by modern economies. |
| Keywords: | environmental values, Nature, ethics, utilitarianism, rights, virtue, incommensurability, intrinsic value, economic valuation, moral considerability/standing, plural values |
| JEL: | A13 B55 D46 D63 Q5 Q57 Q58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwsre:sre-disc-2021_03&r= |