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on Utility Models and Prospect Theory |
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Issue of 2021‒08‒30
fourteen papers chosen by |
| By: | Alfred Galichon; Octavia Ghelfi; Marc Henry |
| Abstract: | We highlight the tension between stability and equality in non transferable utility matching. We consider many to one matchings and refer to the two sides of the market as students and schools. The latter have aligned preferences, which in this context means that a school's utility is the sum of its students' utilities. We show that the unique stable allocation displays extreme inequality between matched pairs. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.06587&r= |
| By: | Zuo Quan Xu |
| Abstract: | This study exams a Pareto optimal insurance problem, where the insured maximizes her rank-dependent utility and the insurer employs the mean-variance premium principle. To eliminate some possible moral hazard issues, we only consider moral-hazard-free insurance contracts that obey the incentive compatibility constraint. The insurance problem is first formulated as a non-concave maximization problem involving Choquet expectation, then turned into a concave quantile optimization problem and finally solved by calculus of variations method. The optimal contract is expressed by a semi-linear second order double-obstacle ordinary differential equation with nonlocal operator. When the probability weighting function has a density, an effective numerical method is proposed to compute the optimal contract. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.06940&r= |
| By: | Gorbunov, Vladimir |
| Abstract: | The paper presents a revision of the contemporary reductionistic demand theory, replacing the studying object, i.e. an individual, with a fuzzy collection of market buyers, regarded as a “statistical ensemble of consumers”. The new holistic market demand theory formally retains the neoclassical demand theory with reconsidering the utility function as a collective one. A nonparametric verification method is presented, which uses the economic (Konüs) and formula Fisher indexes. The method has a variational character based on the theory of ill-posed problems. Verification is carried out simultaneously with the construction of Konüs indexes. The method is demonstrated on an example of the new Giffen demand model. |
| Keywords: | Statistical consumers’ ensemble ∙ Collective utility function ∙ Verification ∙ Ill-posed problems ∙ Konüs indexes ∙ Giffen demand |
| JEL: | C18 C43 C61 D11 D12 |
| Date: | 2021–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109154&r= |
| By: | Guodong Ding; Daniele Marazzina |
| Abstract: | In this work we analytically solve an optimal retirement problem, in which the agent optimally allocates the risky investment, consumption and leisure rate to maximise a gain function characterised by a power utility function of consumption and leisure, through the duality method. We impose different liquidity constraints over different time spans and conduct a sensitivity analysis to discover the effect of this kind of constraint. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.09035&r= |
| By: | Luca Rigotti; Arie Beresteanu |
| Abstract: | We provide a sharp identification region for discrete choice models in which consumers' preferences are not necessarily complete and only aggregate choice data is available to the analysts. Behavior with non complete preferences is modeled using an upper and a lower utility for each alternative so that non-comparability can arise. The identification region places intuitive bounds on the probability distribution of upper and lower utilities. We show that the existence of an instrumental variable can be used to reject the hypothesis that all consumers' preferences are complete, while attention sets can be used to rule out the hypothesis that all individuals cannot compare any two alternatives. We apply our methods to data from the 2018 mid-term elections in Ohio. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.06282&r= |
| By: | Benoît Carmichael; Gilles Boevi Koumou; Kevin Moran |
| Abstract: | We use an equivalent form of Markowitz's mean-variance utility function, based on Rao's Quadratic Entropy (RQE), to enrich the standard capital asset pricing model (CAPM), both in the presence and in the absence of a risk-free asset. The resulting equilibrium, which we denote RQE-CAPM, offers important new insights about the pricing of risk. Notably, it reveals that the reason for which the standard CAPM does not price idiosyncratic risk is not only because the market portfolio is law of large numbers diversifed but also because the model implicitly assumes agents' total risk aversion and their correlation diversifcation risk preference balance each other exactly. We then demonstrate that idiosyncratic risk is priced in a general RQE-CAPM where agents' total risk aversion and their correlation diversifcation risk preference coeffcients are not necessary equal. Our general RQE-CAPM therefore offers a unifying way of thinking about the pricing of idiosyncratic risk, including cases where such risk is negatively priced, and is relevant for the literature assessing the idiosyncratic risk puzzle. It also provides a natural theoretical underpinning for the empirical tests of the CAPM or the pricing of idiosyncratic risk performed in some existence studies. Nous utilisons une forme équivalente de la fonction d'utilité moyenne-variance de Markowitz, basée sur l'entropie quadratique de Rao (RQE), pour enrichir le modèle standard d'évaluation des actifs financiers (CAPM), à la fois en présence et en l'absence d'un actif sans risque. L'équilibre qui en résulte, que nous désignons par RQE-CAPM, offre de nouvelles perspectives importantes sur l'évaluation du risque. Il révèle notamment que la raison pour laquelle le CAPM standard n'évalue pas le risque idiosyncratique n'est pas seulement due au fait que le portefeuille du marché est diversifié par la loi des grands nombres, mais aussi au fait que le modèle suppose implicitement que l'aversion totale au risque des agents et leur préférence pour le risque de diversification de la corrélation s'équilibrent exactement. Nous démontrons ensuite que le risque idiosyncratique est évalué dans un RQE-CAPM général où l'aversion totale au risque des agents et leurs coefficients de préférence pour le risque de diversification de la corrélation ne sont pas nécessairement égaux. Notre modèle RQE-CAPM général offre donc une façon unifiée de penser à la tarification du risque idiosyncratique, y compris les cas où ce risque est évalué négativement, et est pertinent pour la littérature évaluant l'énigme du risque idiosyncratique. Il fournit également une base théorique naturelle pour les tests empiriques du MEDAF ou de la tarification du risque idiosyncratique effectués dans certaines études d'existence. |
| Keywords: | Rao's Quadratic Entropy,Mean-Variance Model,Capital Asset Pricing Model,Idiosyncratic Risk,Correlation Diversiffcation, Entropie quadratique de Rao,modèle moyenne-variance,modèle d'évaluation des actifs financiers,risque idiosyncratique,corrélation et diversification |
| JEL: | G11 G12 |
| Date: | 2021–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2021s-28&r= |
| By: | Sebastian Jaimungal; Silvana Pesenti; Ye Sheng Wang; Hariom Tatsat |
| Abstract: | We present a reinforcement learning (RL) approach for robust optimisation of risk-aware performance criteria. To allow agents to express a wide variety of risk-reward profiles, we assess the value of a policy using rank dependent expected utility (RDEU). RDEU allows the agent to seek gains, while simultaneously protecting themselves against downside events. To robustify optimal policies against model uncertainty, we assess a policy not by its distribution, but rather, by the worst possible distribution that lies within a Wasserstein ball around it. Thus, our problem formulation may be viewed as an actor choosing a policy (the outer problem), and the adversary then acting to worsen the performance of that strategy (the inner problem). We develop explicit policy gradient formulae for the inner and outer problems, and show its efficacy on three prototypical financial problems: robust portfolio allocation, optimising a benchmark, and statistical arbitrage |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.10403&r= |
| By: | Abelló, Francisco; Ribera, Luis A.; DeLaune, Paul B. |
| Keywords: | Risk and Uncertainty, Production Economics, Productivity Analysis |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea21:312788&r= |
| By: | Dietmar Fehr; Yannick Reichlin |
| Abstract: | We show that perceptions of relative rank in the wealth distribution shape individuals’ willingness to take risks. Using a representative large-scale survey, we manipulate perceptions of relative standing by randomly varying response categories when asking respondents about their wealth level. Respondents who are induced to perceive their relative position as low display more tolerance towards risk in a subsequent incentivized lottery task. This effect is mainly driven by individuals who more firmly believe that life outcomes are beyond their control. This interaction between risk preferences and underlying beliefs spotlights the benefits of incorporating personality traits into economic analysis. |
| Keywords: | relative wealth, risk taking, survey, experiment, locus of control |
| JEL: | D31 D63 D81 D91 E21 I31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9253&r= |
| By: | Ferdinand Vieider (-) |
| Abstract: | I derive a noisy neural coding model (NCM ) and pit its performance against prospect theory plus additive noise (PT) using some prominent recent datasets collected to measure PT parameters. The NCM is based on the premise that choice patterns observed under uncertainty may originate from noisy perceptions of choice stimuli, which are optimally combined with mental priors to obtain actionable decision parameters. This contrast with PT, which models preferences as deterministic, but adds a noise term for empirical implementations. I show how the parameters emerging from the NCM naturally map into PT parameters. The NCM can thus be seen as a generative model for PT. At the same time, the NCM departs from PT in that it is inherently stochastic. This results in novel predictions about systematic correlations between PT parameters, as well as pointing to instances under which PT will be violated. Using Bayesian hierarchical models to fit the data, I find substantial support for these predictions. The NCM further consistently outperforms PT in terms of predictive ability. These results contribute to the nascent literature documenting the role played by imprecise cognition in economic decisions. |
| Keywords: | risk taking, prospect theory, noisy cognition, efficient coding |
| JEL: | C93 D03 D80 O12 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:21/1022&r= |
| By: | Yuval Salant; Jörg L. Spenkuch |
| Abstract: | We study two dimensions of complexity that may interfere with individual choice. The first one is object complexity, which corresponds to the difficulty in evaluating any given alternative in a choice set. The second dimension is composition complexity, which increases when suboptimal alternatives become more similar to optimal ones. We develop a satisficing-with-evaluation-errors theory that incorporates both dimensions and delivers sharp empirical predictions about their effect on choice behavior. We confirm these predictions in a novel data set with information on hundreds of millions of decisions in chess endgames. First, as the object complexity of an optimal (suboptimal) alternative increases, it becomes less (more) likely to be chosen. Second, even highly experienced decision-makers are more likely to make mistakes when choosing from sets with higher composition complexity. These findings help to shed some of the first light on the effect of complexity on choice behavior outside of the laboratory. |
| Keywords: | complexity, choice, satisficing, bounded rationality |
| JEL: | D91 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9239&r= |
| By: | Charles Collet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique); Pascal Gastineau (AME-SPLOTT - Systèmes Productifs, Logistique, Organisation des Transports et Travail - Université Gustave Eiffel); Benoit Chèze (IFPEN - IFP Energies nouvelles - IFPEN - IFP Energies nouvelles); Frederic Martinez (AME-DCM - Dynamiques des changements de mobilité - Université de Lyon - Université Gustave Eiffel); Pierre-Alexandre Mahieu (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UN - Université de Nantes - ECN - École Centrale de Nantes - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes) |
| Abstract: | The transportation sector constitutes one of the main contributors to CO2 emissions. Several incentive measures have been already proposed by economists to mitigate these emissions. But, as we all know, these tools have met with mixed success. This paper proposes the use of attribute valence framing, i.e. a description of the same object/characteristics positively or negatively, in order to reduce CO2 emissions. This so-called nudge is easier to implement than more traditional tools, such as taxation, and does not rely on the stringent assumption that individuals are fully rational. The findings from a discrete choice experiment focusing on long-distance travel choice are reported herein. Results indicate that a loss framing on CO2 emissions significantly increases the respondents' practice of pro-environmental behaviors. The framing effect is larger when applied to CO2 than to travel duration (+50% and +30% of the willingness to pay, respectively). In employing psychological constructs, it is shown that preferences are affected by individuals' psychological features (i.e. a preference for the future and environmental self-identity), and moreover that the magnitude of the framing effect depends on individuals' motivational strategies. |
| Keywords: | Framing effect,Discrete choice experiment,Pro-environmental behavior,Travelers' willingness to pay |
| Date: | 2021–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03321706&r= |
| By: | Adrian Fernandez-Perez (AUT - Auckland University of Technology); Ana-Maria Fuertes (Sir John Cass Business School); Joelle Miffre (Audencia Business School) |
| Abstract: | This paper studies the energy futures risk premia that can be extracted through long-short portfolios that exploit heterogeneities across contracts as regards various characteristics or signals and integrations thereof. Investors can earn a sizeable premium of about 8% and 12% per annum by exploiting the energy futures contract risk associated with the hedgers' net positions and roll-yield characteristics, respectively, in line with predictions from the hedging pressure hypothesis and theory of storage. Simultaneously exploiting various signals towards style-integration with alternative weighting schemes further enhances the premium. In particular, the style-integrated portfolio that equally weights all signals stands out as the most effective. The findings are robust to transaction costs, data mining and sub-period analyses. |
| Keywords: | Integration,Long-short portfolios,Risk premium,Energy futures markets |
| Date: | 2021–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03312959&r= |
| By: | Noel Rapa (Central Bank of Malta) |
| Abstract: | In response to the rapid spread of the COVID-19 pandemic, national governments have implemented a range of mitigation measures designed to limit the transmission of the novel virus. In order to estimate the effects of these†non-pharmaceutical†policies, one needs to properly account for prevalence responses; self-imposed restrictions of individuals who trade-off the utility derived from social interactions against the risk of infection. We study the determinants of community mobility across the European Union during the COVID-19 crisis, focusing on government and self-imposed restrictions. Results indicate that timeseries breaks in all types of mobility were clustered across time and EU states, with the most discretionary types falling first and by the largest amounts. Mobility measures fall only after the escalation of government containment measures, with school closures and cancellation of public events preceding falls in all types of mobility across all EU states. This indicates that these two policies have led to an overall risk re-assessment by the general public leading to self-imposed yet not self-initiated falls in mobility. Finally, self-imposed restrictions occurring independently of government measures are responsible for a significant part in the fall of post-pandemic mobility in the EU. |
| JEL: | I12 I18 D70 D80 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:mlt:wpaper:0321&r= |