nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒11‒01
eight papers chosen by

  1. Approximate Core for Committee Selection via Multilinear Extension and Market Clearing By Kamesh Munagala; Yiheng Shen; Kangning Wang; Zhiyi Wang
  2. Motivated belief updating and rationalization of information By Drobner, Christoph; Goerg, Sebastian J.
  3. Interpreting the Will of the People: A Positive Analysis of Ordinal Preference Aggregation By Sandro Ambuehl; B. Douglas Bernheim
  4. Risk aversion and the value of diagnostic tests By Hal Bleichrodt; David Crainich; Louis Eeckhoudt; Nicolas Treich
  5. Computational Efficiency in Multivariate Adversarial Risk Analysis Models By Michael Macgregor Perry; Hadi El-Amine
  6. Long Run Risk Model and Equity Premium Puzzle in Thailand By Sartja Duangchaiyoosook; Weerachart Kilenthong
  7. Preferences and Covid-19 Vaccination Intentions By Serge Blondel; François Langot; Judith Mueller; Jonathan Sicsic
  8. Market Design By Nikhil Agarwal; Eric Budish

  1. By: Kamesh Munagala; Yiheng Shen; Kangning Wang; Zhiyi Wang
    Abstract: Motivated by civic problems such as participatory budgeting and multiwinner elections, we consider the problem of public good allocation: Given a set of indivisible projects (or candidates) of different sizes, and voters with different monotone utility functions over subsets of these candidates, the goal is to choose a budget-constrained subset of these candidates (or a committee) that provides fair utility to the voters. The notion of fairness we adopt is that of core stability from cooperative game theory: No subset of voters should be able to choose another blocking committee of proportionally smaller size that provides strictly larger utility to all voters that deviate. The core provides a strong notion of fairness, subsuming other notions that have been widely studied in computational social choice. It is well-known that an exact core need not exist even when utility functions of the voters are additive across candidates. We therefore relax the problem to allow approximation: Voters can only deviate to the blocking committee if after they choose any extra candidate (called an additament), their utility still increases by an $\alpha$ factor. If no blocking committee exists under this definition, we call this an $\alpha$-core. Our main result is that an $\alpha$-core, for $\alpha 1.015$ for submodular utilities, and a lower bound of any function in the number of voters and candidates for general monotone utilities.
    Date: 2021–10
  2. By: Drobner, Christoph; Goerg, Sebastian J.
    Abstract: We study belief updating about relative performance in an ego-relevant task. Manipulating beliefs about the ego-relevance of the task, we show that subjects update their beliefs about relative performance more optimistically as direct belief utility increases. This finding provides clean evidence for the optimistic belief updating hypothesis and supports theoretical models with direct belief utility. Moreover, we document that subjects ex-post rationalize information by discounting their beliefs about the ego-relevance of the task as the number of bad signals increases. Taken together, these findings suggest that subjects use two alternative strategies to protect their ego despite the presence of objective information.
    Keywords: Motivated beliefs,Optimistic belief updating,Direct belief utility,Bayes' rule,Ex-post rationalization
    JEL: C91 D83 D84
    Date: 2021
  3. By: Sandro Ambuehl; B. Douglas Bernheim
    Abstract: Collective decision making requires preference aggregation even if no ideal aggregation method exists (Arrow, 1950). We investigate how individuals think groups should aggregate members' ordinal preferences—that is, how they interpret "the will of the people." Our experiment elicits revealed attitudes toward ordinal preference aggregation and classifies subjects according to the rules they implicitly deploy. Majoritarianism is rare while rules that promote compromise are common. People evaluate relative sacrifice by inferring cardinal utility from ordinal ranks. Cluster analysis reveals that our classification encompasses all important aggregation rules. Aggregation methods exhibit stability across domains and across countries with divergent traditions.
    JEL: C91 D7
    Date: 2021–10
  4. By: Hal Bleichrodt; David Crainich (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Louis Eeckhoudt (IESEG School of Management Lille); Nicolas Treich (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)
    Abstract: Diagnostic tests allow better informed medical decisions when there is uncertainty about a patient's health status and, therefore, about the desirability to undertake treatment. This paper studies the relation between the expected value of diagnostic information and a patient's risk aversion. We show that the ex ante value of diagnostic information increases with risk aversion for diseases with low prevalence, but decreases with risk aversion for diseases with high prevalence. On the other hand, the ex post value of diagnostic information always increases with the patient's degree of risk aversion.
    Keywords: Diagnostic risks,Diagnostic tests,Value of information,Risk aversion
    Date: 2020–03
  5. By: Michael Macgregor Perry; Hadi El-Amine
    Abstract: In this paper we address the computational feasibility of the class of decision theoretic models referred to as adversarial risk analyses (ARA). These are models where a decision must be made with consideration for how an intelligent adversary may behave and where the decision-making process of the adversary is unknown, and is elicited by analyzing the adversary's decision problem using priors on his utility function and beliefs. The motivation of this research was to develop a computational algorithm that can be applied across a broad range of ARA models; to the best of our knowledge, no such algorithm currently exists. Using a two-person sequential model, we incrementally increase the size of the model and develop a simulation-based approximation of the true optimum where an exact solution is computationally impractical. In particular, we begin with a relatively large decision space by considering a theoretically continuous space that must be discretized. Then, we incrementally increase the number of strategic objectives which causes the decision space to grow exponentially. The problem is exacerbated by the presence of an intelligent adversary who also must solve an exponentially large decision problem according to some unknown decision-making process. Nevertheless, using a stylized example that can be solved analytically we show that our algorithm not only solves large ARA models quickly but also accurately selects to the true optimal solution. Furthermore, the algorithm is sufficiently general that it can be applied to any ARA model with a large, yet finite, decision space.
    Date: 2021–10
  6. By: Sartja Duangchaiyoosook; Weerachart Kilenthong
    Abstract: This paper shows that the long-run risk model of Bansal and Yaron (2004) can potentially solve the equity premium and risk-free rate puzzles in Thailand. In particular, the calibrated values of the risk aversion and the elasticity of intertemporal substitution are empirically plausible. Risk decomposition results indicate that long-run risk is the most important risk component relevant to asset prices; that is, asset prices in Thai financial markets are most sensitive to small changes in news regarding long-term expected growth rates. Volatility risk also has an impact on asset prices but its impact is just about a quarter of the impact of the long-run risk.
    Keywords: Equity Premium Puzzle; Long-run Risk Model; Long-run Component Risk; Asset Pricing; Generalized Method of Moments
    JEL: G12
    Date: 2021–04
  7. By: Serge Blondel (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - Institut National de l'Horticulture et du Paysage, LIRAES - EA 4470 - Laboratoire Interdisciplinaire de Recherche Appliquée en Economie de la Santé - UP - Université de Paris); François Langot (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPREMAP - Centre pour la recherche économique et ses applications - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Judith Mueller (EHESP - École des Hautes Études en Santé Publique [EHESP], Institut Pasteur [Paris]); Jonathan Sicsic (LIRAES - EA 4470 - Laboratoire Interdisciplinaire de Recherche Appliquée en Economie de la Santé - UP - Université de Paris)
    Abstract: This paper shows that prospect theory, extended to account for differences across individuals in their patience and their valuation of the vaccination as a common good can explain why more than 40% of the population has intent to reject the Covid-19 vaccination, as well as the differences in vaccination intentions across population subgroups. Indeed, prospect theory by over-weighting the side effect explains the reject of vaccination. This can be partially compensated by a high patience and/or a large valuation of the collective immunity. The calibrated version of our model, based on an original survey carried out on a representative sample of the adult population living in France allowing us to identify curvatures of their value function, their discount rates and their willingness to cooperate, can predict the evolution of the vaccination intentions between November 2020 an March 2021. We also show that the international differences in the vaccination intentions are closely related to the valuation of the vaccination as a common good.
    Keywords: behavioral economics,Covid-19,prospect theory,vaccination choice
    Date: 2021–10–16
  8. By: Nikhil Agarwal; Eric Budish
    Abstract: This Handbook chapter seeks to introduce students and researchers of industrial organization (IO) to the field of market design. We emphasize two important points of connection between the IO and market design fields: a focus on market failures—both understanding sources of market failure and analyzing how to fix them—and an appreciation of institutional detail. Section II reviews theory, focusing on introducing the theory of matching and assignment mechanisms to a broad audience. It introduces a novel “taxonomy” of market design problems, covers the key mechanisms and their properties, and emphasizes several points of connection to traditional economic theory involving prices and competitive equilibrium. Section III reviews structural empirical methods that build on this theory. We describe how to estimate a workhorse random utility model under various data environments, ranging from data on reported preference data such as rank-order lists to data only on observed matches. These methods enable a quantification of trade-offs in designing markets and the effects of new market designs. Section IV discusses a wide variety of applications. We organize this discussion into three broad aims of market design research: (i) diagnosing market failures; (ii) evaluating and comparing various market designs; (iii) proposing new, improved designs. A point of emphasis is that theoretical and empirical analysis have been highly complementary in this research.
    JEL: C78 D47 L00
    Date: 2021–10

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