nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒09‒13
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. An Effective and Simple Tool for Measuring Loss Aversion By Olivier L'Haridon; Craig S. Webb; Horst Zank
  2. Closed-form portfolio optimization under GARCH models By Marcos Escobar-Anel; Maximilian Gollart; Rudi Zagst
  3. On the estimation of discrete choice models to capture irrational customer behaviors By Sanjay Dominik Jena; Andrea Lodi; Claudio Sole
  4. Fuzzy Conventions By Marcin P\k{e}ski
  5. Rational Inattention via Ignorance Equivalence By Roc Armenter; Michèle Müller-Itten; Zachary Strangebye
  6. Stable marriage, household consumption and unobserved match quality By Martin Browning; Laurens Cherchye; Thomas Demuynck; Bram De Rock; Frederic Vermeulen
  7. Different policy effects of Ramsey and overlapping generations models By Watanabe, Minoru; Yasuoka, Masaya
  8. A Bayesian Cost-effectiveness analysis of Holobalance, Holograms for personalized virtual coaching and motivation in an ageing population with balance disorders By Abreha, Fasika Molla; Salmasi, Luca; Ianuale, Nicola; Pegoraro, Enrico
  9. Principal Agent Problem as a Principled Approach to Electronic Counter-Countermeasures in Radar By Anurag Gupta; Vikram Krishnamurthy
  10. Privacy Decision-Making in Digital Markets: Eliciting Individuals' Preferences for Transparency By Fast, Victoria; Sachs, Nikolai; Schnurr, Daniel
  11. Risk Preference and Crop Diversification By Xu, Licheng

  1. By: Olivier L'Haridon; Craig S. Webb; Horst Zank
    Abstract: In prospect theory (PT) the loss aversion index, lambda, measures the size of the concave kink of the gain-loss utility function at the reference point. A truth-telling mechanism for assessing personal beliefs, the quadratic scoring rule, is extended to measure loss aversion. We control for the bias captured by decision weights in PT and quantify lambda efficiently with only three quadratic scores. In an experiment, we demonstrate these features for risk and extend the tool to ambiguity. We find median values of lambda = 1 at the aggregate level for both sources of uncertainty. Probability and event weighting are less pronounced but accord with earlier findings from the literature. These weights depend on the sign of the corresponding outcomes, which is implication of reference-dependent preferences. Event weighting is also observed at the individual level. After controlling for these weights, we find very few subjects who are loss averse or gain seeking.
    JEL: C78 C91 D81 D90
    Date: 2021
  2. By: Marcos Escobar-Anel; Maximilian Gollart; Rudi Zagst
    Abstract: This paper develops the first closed-form optimal portfolio allocation formula for a spot asset whose variance follows a GARCH(1,1) process. We consider an investor with constant relative risk aversion (CRRA) utility who wants to maximize the expected utility from terminal wealth under a Heston and Nandi (2000) GARCH (HN-GARCH) model. We obtain closed formulas for the optimal investment strategy, the value function and the optimal terminal wealth. We find the optimal strategy is independent of the development of the risky asset, and the solution converges to that of a continuous-time Heston stochastic volatility model, albeit under additional conditions. For a daily trading scenario, the optimal solutions are quite robust to variations in the parameters, while the numerical wealth equivalent loss (WEL) analysis shows good performance of the Heston solution, with a quite inferior performance of the Merton solution.
    Date: 2021–09
  3. By: Sanjay Dominik Jena; Andrea Lodi; Claudio Sole
    Abstract: The Random Utility Maximization model is by far the most adopted framework to estimate consumer choice behavior. However, behavioral economics has provided strong empirical evidence of irrational choice behavior, such as halo effects, that are incompatible with this framework. Models belonging to the Random Utility Maximization family may therefore not accurately capture such irrational behavior. Hence, more general choice models, overcoming such limitations, have been proposed. However, the flexibility of such models comes at the price of increased risk of overfitting. As such, estimating such models remains a challenge. In this work, we propose an estimation method for the recently proposed Generalized Stochastic Preference choice model, which subsumes the family of Random Utility Maximization models and is capable of capturing halo effects. Specifically, we show how to use partially-ranked preferences to efficiently model rational and irrational customer types from transaction data. Our estimation procedure is based on column generation, where relevant customer types are efficiently extracted by expanding a tree-like data structure containing the customer behaviors. Further, we propose a new dominance rule among customer types whose effect is to prioritize low orders of interactions among products. An extensive set of experiments assesses the predictive accuracy of the proposed approach. Our results show that accounting for irrational preferences can boost predictive accuracy by 12.5% on average, when tested on a real-world dataset from a large chain of grocery and drug stores.
    Date: 2021–09
  4. By: Marcin P\k{e}ski
    Abstract: We study binary coordination games with random utility played in networks. A typical equilibrium is fuzzy -- it has positive fractions of agents playing each action. The set of average behaviors that may arise in an equilibrium typically depends on the network. The largest set (in the set inclusion sense) is achieved by a network that consists of a large number of copies of a large complete graph. The smallest set (in the set inclusion sense) is achieved on a lattice-type network. It consists of a single outcome that corresponds to a novel version of risk dominance that is appropriate for games with random utility.
    Date: 2021–08
  5. By: Roc Armenter; Michèle Müller-Itten; Zachary Strangebye
    Abstract: We introduce the concept of the ignorance equivalent to effectively summarize the payoff possibilities in a finite Rational Inattention problem. The ignorance equivalent is a unique fictitious action that is weakly preferable to all existing learning strategies and yet generates no new profitable learning opportunities when added to the menu of choices. We fully characterize the relationship between the ignorance equivalent and the optimal learning strategies. Agents with heterogeneous priors self-select their own ignorance equivalent, which gives rise to an expected-utility analogue of the Rational Inattention problem. The approach provides new insights for menu expansion, the formation of consideration sets, the value of information, and belief elicitation. In a strategic game of contract choice, the ignorance equivalent emerges naturally in equilibrium.
    Keywords: Rational inattention; information acquisition; learning.
    JEL: D81 D83 C63
    Date: 2021–09–03
  6. By: Martin Browning (CEBI, Department of Economics, University of Copenhagen); Laurens Cherchye (Department of Economics, University of Leuven); Thomas Demuynck (ECARES, Université Libre de Bruxelles); Bram De Rock (ECARES, Université Libre de Bruxelles and Department of Economics, University of Leuven); Frederic Vermeulen (Department of Economics, University of Leuven)
    Abstract: We present a methodology for the structural empirical analysis of household consumption and time use behaviour under marital stability. Our approach is of the revealed preference type and non-parametric, meaning that it does not require a prior functional specification of individual utilities. Without making use of the transferable utility assumption, but still allowing for monetary transfers, our method can identify individuals' unobserved match qualities and quantify them in money metric terms. We can include both preference factors, affecting individuals' preferences over private and public goods, and match quality factors, driving differences in unobserved match quality. We demonstrate the practical usefulness of our methodology through an application to the Belgian MEqIn data. Our results reveal intuitive patterns of unobserved match quality that allow us to rationalise both the observed matches and the within-household allocations of time and money.
    Keywords: household consumption, marital stability, unobserved match quality, revealed preference analysis, intrahousehold allocation
    JEL: C14 D11 C78
    Date: 2021–09–23
  7. By: Watanabe, Minoru; Yasuoka, Masaya
    Abstract: Effects of taxation are examined in many studies. For such studies, the model economy assumes a logarithmic utility function. Results derived from our study indicate that attention should be devoted to using logarithm utility functions. We check the redistribution policy effect financed by capital income taxation in models of two types: a Ramsey model and an overlapping generations model. If the labor supply is inelastic, then effects of the redistribution policy financed by taxation of capital income differs between the Ramsey model and the overlapping generations model. However, if the labor supply is elastic, then the policy financed by capital income taxation is the same between the Ramsey model and the overlapping generations model. Moreover, this study presents simulation results.
    Keywords: Overlapping generations model, Ramsey model, Redistribution, Taxation
    JEL: E24 H20
    Date: 2021–09–06
  8. By: Abreha, Fasika Molla; Salmasi, Luca; Ianuale, Nicola; Pegoraro, Enrico
    Abstract: Introduction: The world population is aging and it is only expected to grow in the next 30 years reaching 16% of the total world population (1). Globally, fall among older adults is a major public health problem.The burden of mortality and morbidity as a result of fall incidents is high in the elderly. There is a multitude of fall prevention programs designed based on the different risk factors associated with fall risk. Among these exercise programs have been shown to reduce the incidence of falls by 13% (6) to 40% (7).The Otago Exercise Program is an eight-week exercise that involves 17 different exercises that vary based on intensity with different repetitions and weight. It has been used as the cornerstone of most fall prevention exercise programs and has been shown to reduce fall risk in the elderly population by 35% (2,3). More recently, the use of virtual technologies has been an emerging phenomenon in the practice of elderly rehabilitation and exercise program. The Holobalance program, a novel methodology developed under the EU Horizon 2020 innovation project (8), was initiated to develop and validate a new personalized hologram coach platform for virtual coaching, motivation, and empowerment of the aging population with balance disorders. Methods: Bayesian cost-effectiveness analysis of two alternatives namely Otago Exercise Program and Holobalance technology is performed by considering the relevant probabilities of the outcomes, the associated cost, and utility loss for each relevant outcome for three countries i.e. Italy, Germany, and Greece. Relevant data was obtained using literature review of the enumerated parameters and the associated cost as well as utility. Additional data regarding Holobalance technology was obtained from the first data of an ongoing clinical pilot. Results: The ICER associated with the highest WTP under consideration, 30000€, is - 103879 for Italy, -86560 for Greece, and -107666 for Germany. The average expected utility loss for the WTP of 30,000 Euros in the case of the Otago exercise program is -819.51, -624.77, -774.41 for Italy, Greece, and Germany respectively. In the case of Holobalance, it is -478.31, -352.57, and -383.53 respectively for Italy, Greece, and Germany. All the values of the EIB are positive in all of the willingness to pay values that were considered (10,000, 25,000, 30,000) for all of the three countries. The mean cost to implement the Otago exercise program is higher compared to the average cost for Holobalance for the three countries. Conclusion: In all the three countries considered in this analysis, Holobalance is found to be more cost-effective than the Otago exercise program. In this Bayesian Cost-Effectiveness Analysis, the Holobalnce technology is the dominant alternative with a lower cost and a higher level of effectiveness compared to the current standard therapy i.e Otago Exercise program.
    Keywords: Bayesian Cost Effectiveness Analysis, Holobalance, Fall, Elderly, Virtual Reality, Economic Evaluation
    JEL: C11 I00 I10 I11 I18
    Date: 2021–08–21
  9. By: Anurag Gupta; Vikram Krishnamurthy
    Abstract: Electronic countermeasures (ECM) against a radar are actions taken by an adversarial jammer to mitigate effective utilization of the electromagnetic spectrum by the radar. On the other hand, electronic counter-countermeasures (ECCM) are actions taken by the radar to mitigate the impact of electronic countermeasures (ECM) so that the radar can continue to operate effectively. The main idea of this paper is to show that ECCM involving a radar and a jammer can be formulated as a principal-agent problem (PAP) - a problem widely studied in microeconomics. With the radar as the principal and the jammer as the agent, we design a PAP to optimize the radar's ECCM strategy in the presence of a jammer. The radar seeks to optimally trade-off signal-to-noise ratio (SNR) of the target measurement with the measurement cost: cost for generating radiation power for the pulse to probe the target. We show that for a suitable choice of utility functions, PAP is a convex optimization problem. Further, we analyze the structure of the PAP and provide sufficient conditions under which the optimal solution is an increasing function of the jamming power observed by the radar; this enables computation of the radar's optimal ECCM within the class of increasing affine functions at a low computation cost. Finally, we illustrate the PAP formulation of the radar's ECCM problem via numerical simulations. We also use simulations to study a radar's ECCM problem wherein the radar and the jammer have mismatched information.
    Date: 2021–09
  10. By: Fast, Victoria; Sachs, Nikolai; Schnurr, Daniel
    Abstract: Consumers often lack information about how online services collect, use and protect their data. Therefore, transparency is frequently touted as an essential instrument to support consumers in assessing privacy risks and making more informed decisions. In this context, empirical studies have investigated the effectiveness of transparency in different privacy contexts. However, whether individuals actually prefer transparency when given a chance to avoid information about privacy risks is less clear. Thus, we investigate how individuals choose between options with more and less transparency about an uncertain data loss. In this paper, we present the design of an online experiment where student subjects choose between a situation of risk, where a loss of personal data will occur with a known probability, and a situation of ambiguity, where a data loss will occur with an unknown probability. Previous experiments on uncertain money losses show that individuals may not universally prefer the more transparent option where information about risks is made explicit. Therefore, our study sheds light on individuals' transparency preferences when facing privacy risks and provides insights into privacy decision-making under uncertainty. Thus, we contribute to a better understanding of digital service providers' incentives to offer consumers more transparency about their data use, which has direct implications for transparency regulation in data-driven digital markets.
    Keywords: Privacy,Transparency,Privacy uncertainty,Privacy risks,Ambiguity attitudes,Data losses,Online experiment,GDPR,Digital policy
    Date: 2021
  11. By: Xu, Licheng
    Keywords: Risk and Uncertainty, Production Economics, Consumer/Household Economics
    Date: 2021–08

This nep-upt issue is ©2021 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.