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on Utility Models and Prospect Theory |
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Issue of 2021‒10‒04
sixteen papers chosen by |
| By: | Todorova, Tamara |
| Abstract: | This paper discusses how utility can be taught in undergraduate courses in microeconomics so that to illustrate total and marginal utility, the law of diminishing marginal utility, and consumer rationality. Diminishing marginal utility is essential in describing rational consumer behavior, overconsumption, and oversaturation to students of economics. We demonstrate a quadratic and a logarithmic total utility with the subsequent forms and shapes of marginal utility. From what it seems there is no contradiction between diminishing marginal utility in the univariate context of consuming one good and the indifference curve as the multivariate case of two goods consumed. |
| Keywords: | total utility; marginal utility; indifference curve |
| JEL: | A2 A22 B41 D11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109891&r= |
| By: | Philippe de Donder (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - 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); Marie-Louise Leroux (UCL - Université Catholique de Louvain) |
| Abstract: | We study the demand for actuarially fair Long Term Care (LTC hereafter) insurance in a setting where autonomous agents only care for daily life consumption while dependent agents also care for LTC expenditures. We assume that dependency decreases the marginal utility of daily life consumption. We rst obtain that some agents optimally choose not to insure themselves, while no agent wishes to buy complete insurance. We then show that the comparison of marginal utility of income (as opposed to consumption) across health states depends on (i) whether agents do buy LTC insurance at equilibrium or not, (ii) the comparison of the degree of risk aversion for consumption and for LTC expenditures, and (iii) the income level of agents. Our results then oer testable implications that can explain (i) why few people buy Long Term Care insurance and (ii) the discrepancies between various empirical works when measuring the extent of state-dependent preferences for LTC. |
| Keywords: | Risk Aversion,Actuarially Fair Insurance,Long Term Care Insurance Puzzle,State-dependent Preferences. |
| Date: | 2021–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03351447&r= |
| By: | Andrew Yang; Bruce Changlong Xu; Ivan Villa-Renteria |
| Abstract: | Matching markets are of particular interest in computer science and economics literature as they are often used to model real-world phenomena where we aim to equitably distribute a limited amount of resources to multiple agents and determine these distributions efficiently. Although it has been shown that finding market clearing prices for Fisher markets with indivisible goods is NP-hard, there exist polynomial-time algorithms able to compute these prices and allocations when the goods are divisible and the utility functions are linear. We provide a promising research direction toward the development of a market that simulates buyers' preferences that vary according to the bundles of goods allocated to other buyers. Our research aims to elucidate unique ways in which the theory of matching markets can be extended to account for more complex and often counterintuitive microeconomic phenomena. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.14850&r= |
| By: | Kyle Glenn (Department of Economics, Adams State University) |
| Abstract: | In this paper we explore how economists have addressed consumer behavior. We begin by analyzing the fundamental underpinning of neoclassical consumer behavior, utility maximization. We show how the contributions of behavioral economics, which prides itself on finding moments of nonconformity within the theory of consumer behavior, has put into question the validity of mainstream consumer choice modeling Accepting that the orthodox theory provides a poor model, the question remains: What alternative theories of consumer behavior exist? We discuss two alternative frameworks for consumer behavior: the endogenous preferences literature and the post-Keynesian notion of consumer choice. While both frameworks have provided valuable insights into consumer behavior, we argue that neither theory fully captures the complexities of consumer behavior. As such, we turn to literature in Business and Psychology surrounding how consumers actually behave. We find three common principles in the literature: consumer cannot process all information, preferences are malleable, and preferences are categorized eliciting varied behaviors dependent upon the category. We posit a basic neural network model that captures the three principles and illuminates some of the complexities of consumer behavior. |
| Keywords: | Consumer behavior, network models |
| JEL: | B50 D11 D90 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:2114&r= |
| By: | Nesje, Frikk |
| Abstract: | This paper studies whether saving behavior reveals socially relevant intertemporal preferences. I decompose the present generation's preference for the next into its dynastic and cross-dynastic components. If people are concerned about sustainability or if their descendants move or marry, then they might assign welfare weights on other dynasties. With such cross-dynastic intergenerational altruism, saving for one's descendants benefits present members of other dynasties. These preference externalities imply that socially relevant intertemporal preferences cannot be inferred from saving behavior. The external effect of present saving decreases over time. This means that intertemporal preferences inferred from saving behavior are time-inconsistent. |
| Keywords: | Intergenerational altruism,Social discounting,Time-inconsistency,Declining discount rates,Generalized consumption Euler equations,Interdependent utility,Isolation paradox,Climate change |
| JEL: | D64 D71 H43 Q01 Q54 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:242961&r= |
| By: | Guillermo Gallego; Gerardo Berbeglia |
| Abstract: | Consider a clairvoyant firm that knows the products' valuations of each arriving consumer and offers them only the most profitable product they are willing to buy. How much more can such a firm make relative to a firm that offers all consumers the assortment that maximizes expected revenues? We show that for general discrete choice models, the ratio can be exponential in the number of products, but at most equal to the number of products for random utility models. We show that the ratio is at most 2 for the $\alpha$-shaken multinomial logit ($\alpha$-MNL) which includes the MNL and the general attraction model (GAM) as special cases. We also provide sufficient conditions for the ratio of at most 2 to hold for the latent class MNL, and in fact show that in the limit as the coefficient of variation of the utilities goes to infinity the bound is at most 1.5. For all of these cases the revenue-ordered heuristic yields the stated guarantees relevant to the clairvoyant firm. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.14861&r= |
| By: | Martin M. Andreasen (Department of Economics and Business Economics, CREATES, Aarhus University, The Danish Finance Institute); Giovanni Caggiano (Monash University, University of Padova); Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University) |
| Abstract: | This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions. |
| Keywords: | New Keynesian Model, Nonlinear SVAR, Non-recursive identification, State-dependent uncertainty shock, Risky steady state |
| JEL: | C15 C32 C53 E30 |
| Date: | 2021–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2021-12&r= |
| By: | Antoine Billot (LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Université); Xiangyu Qu (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The utilitarian aggregation rule requires social utility and beliefs to be a convex combination of individual utilities and beliefs, respectively. Since, in the case of belief heterogeneity, the standard Pareto condition is incompatible with such a separate aggregation, a new condition, called the belief-proof Pareto condition, is proposed to alleviate occurrences of spurious agreement by restricting unanimity to beliefs that can be considered reasonable by society. Then, we show, in the Anscombe-Aumann (Theorems 1) and the Savage (Theorems 2) framework, that the belief-proof Pareto condition is equivalent to separate aggregation of individual beliefs and tastes. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03034701&r= |
| By: | Zhiyang Jia; Thor O. Thoresen (Statistics Norway) |
| Abstract: | Information about individual choices of heterogeneous agents. Results can for example be used to describe the distributional effects of tax policy change, such as the effects on changes in money metric utility – distributions of equivalent and compensating variation (EV or CV). This type of “revealed preference” methodology relies on using models with sufficient realism. In this paper we argue that the so-called “job choice model” represents a way forward in practical work, as it has a richer representation of choice constraints than conventional labour supply models. This model is also particularly suitable given an increased focus on distinguishing between preferences and constraints in applied welfare analysis. We demonstrate the empirical content of the framework by describing the effects of the Norwegian tax reform 2013–2019 on the distribution of compensating variation (CV). |
| Keywords: | labour supply; money metric utility; distributional effects; tax reform |
| JEL: | H31 I31 J22 C25 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:959&r= |
| By: | Tizié Bene (Aix-Marseille Univ, CNRS, AMSE, Marseille, France); Yann Bramoullé (Aix-Marseille Univ, CNRS, AMSE, Marseille, France); Frédéric Deroïan (Aix-Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | We study how altruism networks affect the adoption of formal insurance. Agents have private CARA utilities and are embedded in a network of altruistic relationships. Incomes are subject to both a common shock and a large idiosyncratic shock. Agents can adopt formal insurance to cover the common shock. We show that ex-post altruistic transfers induce interdependence in ex-ante adoption decisions. We characterize the Nash equilibria of the insurance adoption game. We show that adoption decisions are substitutes and that the number of adopters is unique in equilibrium. The demand for formal insurance is lower with altruism than without at low prices, but higher at high prices. Remarkably, individual incentives are aligned with social welfare. We extend our analysis to CRRA utilities and to a fixed utility cost of adoption. |
| Keywords: | formal insurance, informal transfers, altruism networks |
| JEL: | C72 D85 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2140&r= |
| By: | Ji-Won Park; Jaeup U. Kim; Cheol-Min Ghim; Chae Un Kim |
| Abstract: | Fair division is a significant, long-standing problem and is closely related to social and economic justice. Cake-cutting is a common metaphor for fair division, and it has attracted significant attention from economists, mathematicians, computer scientists, and political scientists. There are widely studied division methods based on certain notions of fairness such as envy-freeness and proportionality. However, these methods are hardly applicable to real-world problems in which heterogeneous goods should be fairly divided between multiple players, and the players have different key factors such as contributions, needs, or preferences with respect to certain portions of the goods. Here, we propose a fair division method from a completely different perspective, using the Boltzmann distribution. The celebrated Boltzmann distribution gives the most probable and unbiased distribution derived from a goods-centric, rather than a player-centric, division process. The mathematical model of the Boltzmann fair division was developed for both homogeneous and heterogeneous cake-cutting problems, and the players' key factors (contributions, needs, and preferences) could be successfully integrated. Then the optimal Boltzmann fair division was searched by total utility maximization. Empirical data analysis shows that the Boltzmann fair division is a division method well balanced between the conventional division methods. We believe the Boltzmann fair division could be easily fine-tuned and applicable to complex real-world problems such as income/wealth redistribution or international negotiations on fighting climate change. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.11917&r= |
| By: | Thibault Gajdos (LPC - Laboratoire de psychologie cognitive - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LNC - Laboratoire de Neurosciences Cognitives [Marseille] - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Clémentine Garrouste (Legos - Laboratoire d'Economie et de Gestion des Organisations de Santé - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres, LEDa - Laboratoire d'Economie de Dauphine - CNRS - Centre National de la Recherche Scientifique - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres); Pierre-Yves Geoffard (CEPR - Center for Economic Policy Research - CEPR, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Using a simple theoretical decision model and an original database, we were able to elicit thedistribution of the utility value of having a child with Down syndrome for a large sample of Frenchpregnant women (n = 28, 341) between 2003 and 2007. We found that, on a scale where the value ofa fetal death is 0 and the value of a healthy child is 1, the mean value for a child with Down syndromeis about −0.6. Assuming that the policymaker used the same decision model as the women, we inferfrom the French amniocentesis reimbursement regulation an implicit social value for a child withDown syndrome of −2.5. We conclude from our study that the policymaker is more likely to preventthe birth of children with Down syndrome than French women themselves. |
| Keywords: | Expected utility framework,Amniocentesis choices |
| Date: | 2021–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-03352871&r= |
| By: | Ioanna Arkoudi; Carlos Lima Azevedo; Francisco C. Pereira |
| Abstract: | This study proposes a novel approach that combines theory and data-driven choice models using Artificial Neural Networks (ANNs). In particular, we use continuous vector representations, called embeddings, for encoding categorical or discrete explanatory variables with a special focus on interpretability and model transparency. Although embedding representations within the logit framework have been conceptualized by Camara (2019), their dimensions do not have an absolute definitive meaning, hence offering limited behavioral insights. The novelty of our work lies in enforcing interpretability to the embedding vectors by formally associating each of their dimensions to a choice alternative. Thus, our approach brings benefits much beyond a simple parsimonious representation improvement over dummy encoding, as it provides behaviorally meaningful outputs that can be used in travel demand analysis and policy decisions. Additionally, in contrast to previously suggested ANN-based Discrete Choice Models (DCMs) that either sacrifice interpretability for performance or are only partially interpretable, our models preserve interpretability of the utility coefficients for all the input variables despite being based on ANN principles. The proposed models were tested on two real world datasets and evaluated against benchmark and baseline models that use dummy-encoding. The results of the experiments indicate that our models deliver state-of-the-art predictive performance, outperforming existing ANN-based models while drastically reducing the number of required network parameters. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.12042&r= |
| By: | Xiu Chen (College of Business, Southern University of Science and Technology); Xiaojian Zhao (Monash University) |
| Abstract: | The paper identifies a potential gap between intertemporal choices and time preference: The elicited intertemporal decisions could be partly driven by a biased perception of time and thus may not completely reveal the actual time preference. To test this, we explore the causal relationship between time perception and intertemporal choices by conducting a laboratory experiment, in which cognitive load is used as a stimulating instrument to induce differences in time perception. We establish that the perceived time lengths for subjects with high cognitive load are shorter than those with low cognitive load and that individuals who underestimate time appear more patient in their intertemporal decisions. The mediation analyses show that time perception mediates a significant part of the cognitive load’s effect on intertemporal choices. Our study thus demonstrates that the time preference identified by intertemporal choices might be confounded by the potentially biased perception of how time flies. |
| Keywords: | time perception, intertemporal choice, time preference, cognitive load |
| JEL: | C91 D91 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2021-09&r= |
| By: | Yihao Luo; Jinhui Pang; Weibin Han; Huafei Sun |
| Abstract: | This paper designs a new choice rule, called the Hodge potential choice, for general abstract games by involving discrete Hodge decomposition. For tournaments as the complete cases of abstract games, we claim that the Hodge potential choice is equivalent to Copeland winner set. For general cases, the Hodge potential choice provides a more reasonable and precise result against traditional methods. Hodge potential choice maintains the essential properties of Copeland winner set, including neutrality, strong monotonicity, cycle independence while it avoids the main disadvantage of Copeland winner set. This paper provides theoretical analysis, a feasible algorithm, examples and several results of digital experiments to show the originality and advantages of the new rule. Furthermore, we extent the method and apply it onto games with marginal utilities. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.14539&r= |
| By: | Kotono Tanigawa (Kumamoto Gakuen University); Tomoya Sakagami (Kumamoto Gakuen University) |
| Abstract: | In this paper, we present a pension policy that supplements the pay-as-you-go pension system with payments by old generations with a high assets income. This supplement is intended to reduce intergenerational inequity. To analyze the effect of this pension policy on both capital stock in the economy and the utilities of the rich and the poor, we build an Over-Lapping Generations model with different incomes when young. This model finds that the stable steady-state capital stock level increases as the old rich generation contributes to the pension system. We also find by numerical simulations that there is a Pareto efficient premium level between high-income and low-income people. |
| Keywords: | pay-as-you-go pension system, intergenerational inequity, overlapping generations model |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1067&r= |