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on Utility Models and Prospect Theory |
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Issue of 2021‒12‒06
fourteen papers chosen by |
| By: | Yan Dolinsky; Shir Moshe |
| Abstract: | We consider the Bachelier model with linear price impact. Exponential utility indifference prices are studied for vanilla European options and we compute their non-trivial scaling limit for a vanishing price impact which is inversely proportional to the risk aversion. Moreover, we find explicitly a family of portfolios which are asymptotically optimal. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.00451&r= |
| By: | Bergolo, Marcelo (IECON, Universidad de la República); Burdin, Gabriel (Leeds University Business School); Burone, Santiago (University of Antwerp); De Rosa, Mauricio (Universidad de la República, Uruguay); Giaccobasso, Matias (University of California, Los Angeles); Leites, Martin (Universidad de la República, Uruguay) |
| Abstract: | Although different approaches and methods have been used to measure inequality aversion, there remains no consensus about its drivers at the individual level. We conducted an experiment on a sample of more than 1800 first-year undergraduate economics and business students in Uruguay to understand why people are inequality averse. We elicited inequality aversion by asking participants to make a sequence of choices between hypothetical societies characterized by varying levels of average income and income inequality. In addition, we use randomized information treatments to prime participants into competing narratives regarding the sources of inequality in society. The main findings are that (1) the prevalence of inequality aversion is high: most participants' choices revealed inequality-averse preferences; (2) the extent of inequality aversion depends on the individual's position in the income distribution; (3) individuals are more likely to accept inequality when it comes from effort rather than luck regardless of their income position; (4) the effect of social mobility on inequality aversion is conditional on individual's income position: preferences for mobility reduces inequality aversion for individuals located at the bottom of the income distribution, where risk aversion cannot play any role. |
| Keywords: | inequality aversion, fairness, risk, effort, luck, redistribution, questionnaire-experiments |
| JEL: | D63 D64 D81 C13 C91 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14828&r= |
| By: | Malakhov, Sergey |
| Abstract: | The recent paper on the Invisible hand proves the fact that its equilibrium is mathematically perfect. If the producer allocates his time between production and delivery to the ‘the door’ of the buyer with zero search costs and unintentionally maximizes customer’s consumption-leisure utility, both the marginal rate of transformation of production into delivery and the marginal rate of substitution of leisure for consumption become equal to the golden ratio conjugate whereas the sales-costs of production ratio becomes equal to the golden ratio itself, called once by Luca Pacioli, the founder of the modern accounting, as the divine proportion. Previous papers on Invisible hand formulated the hypothesis of the gravitation between sellers and buyers on commodity markets and between men and women in marriage markets. The golden ratio proves this hypothesis. At the equilibrium, gravitational fields of both seller and buyer as well as of both husband and wife are equal to the golden ratio conjugate. It means that any monopoly and monopsony really disappear. At the Invisible hand equilibrium, the transaction takes place between mutually attractive individuals. The equilibrium price stays competitive, but its economic nature is supported by the mutual respect of both parts in transaction. |
| Keywords: | golden ratio, invisible hand, gravitation, general competitive equilibrium |
| JEL: | D11 D63 D83 |
| Date: | 2021–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110674&r= |
| By: | Najib Bahmani (Faculté des Sciences Juridiques Économiques et Sociales d'Agadir, Université Ibn Zohr [Agadir]); Mustapha Jaad (Faculté des Sciences Juridiques Économiques et Sociales d'Agadir, Université Ibn Zohr [Agadir]) |
| Abstract: | Since the beginning of the twentieth century, when the concept of "Well-being" has found its new place in economics, the welfare economics, has since consisted of evaluating economic situations, and mainly, the terms of distribution. The debate that was before is only about the measurement of value and utility. Happiness, or well-being, was synonymous with anything that provides satisfaction without necessarily being "useful", yet the relativity of measuring utility was simplified by cumulative aggregation. Indeed, collective well-being represents the sum of the levels of well-being (or utility) of the individuals who make up the community considered. The useful is therefore anything that contributes to maximizing social well-being. Utilitarianism, through functions of marginal utility, has made it possible to identify the optimum of collective and social well-being. On the other hand, and according to the principle of maximization of the sum of well-being, the hypothesis of an equitable distribution of shares, in particular of income between the members of a society, requires that the marginal gain in well-being, in the allocation of resources to different individuals, ie the same everywhere. The fundamental and recapitulated matrix of utilitarianism was uttered by Jeremy Bentham: "The greatest happiness of the greatest number is the measure of just and unjust." The utilitarian doctrine was therefore crucial in the development of several theories in economic and social sciences. We cite in particular the theory of justice. The latter stipulates according to its founder John Rawls, that Men are too egocentric and selfish to determine the principles of fair and equitable distribution of wealth: they seek only to derive their own benefit. Through a theoretical base which presents the economy of well-being, and the theory of justice, our article will deal with the problem of economic inequalities and its perspectives on the attainment of social well-being, in its most extreme ideal's conditions. However, the quest to maximize individual and social well-being was also the subject of several critiques of the utilitarian approach. The cross-sectional analyzes, which we will undertake, will thus allow us to focus our gaze on other modern theories, namely general equilibrium theory, social choice theory, capability theory, and also that of social justice. |
| Abstract: | Depuis le début du XXème siècle, que le concept du « Bien-être » a connu sa nouvelle place en sciences économiques, l'économie du bien-être (welfare economics), consistait depuis lors, à évaluer les situations économiques, et principalement, les modalités de la répartition. Le débat qui était avant ne porte que sur la mesure de la valeur et de l'utilité. Le bonheur, ou le bien-être était synonyme de tout ce qui procure une satisfaction sans être nécessairement « utile », cependant la relativité de mesure de l'utilité, était simplifiée par une agrégation cumulative. En effet le bien-être collectif représente la somme des niveaux de bien-être (ou d'utilité) des individus qui composent la collectivité considérée. L'utile est donc tout ce qui contribue à maximiser le bien-être social. L'utilitarisme, à travers des fonctions d'utilité marginale, a permis d'identifier l'optimum du bien-être collectif et social. En revanche, et selon le principe de maximisation de la somme du bien-être, l'hypothèse d'une distribution de parts équitables notamment des revenus entre les membres d'une société, exige que le gain marginal en bien-être, dans l'affectation des ressources aux différents individus, soit partout le même. La matrice fondamentale et récapitulative de l'utilitarisme était prononcée par Jeremy Bentham : « Le plus grand bonheur du plus grand nombre est la mesure du juste et de l'injuste ». La doctrine utilitariste était donc cruciale dans le développement de plusieurs théories en sciences économiques et sociales. On cite notamment la théorie de la justice. Cette dernière stipule selon son fondateur John Rawls, que les Hommes sont trop égocentriques et égoïstes pour déterminer des principes de répartition des richesses justes et équitables : ils cherchent uniquement à tirer leur propre bénéfice. À travers, un soubassement théorique qui présente l'économie du bien-être, et la théorie de la justice, notre article traitera, la problématique des inégalités économiques et ses perspectives sur l'atteinte du bien-être social, sous ses états les plus idéaux. Or, la recherche à maximiser le bien-être individuel et social, faisait aussi l'objet de plusieurs critiques de l'approche utilitariste. Les analyses transversales, que nous entamerons-nous permettront ainsi de focaliser le regard sur les autres théories modernes à savoir la théorie de l'équilibre général, la théorie du choix social, la théorie des capabilités, et aussi celle de la justice sociale. |
| Keywords: | social welfare,well-being,social justice,Inequalities,Justice sociale,Inégalités,P36,P46,H75,D63,social welfare. JEL Classification: I31,sociales et juridiques Inequalities,Bien-être social,Faculté des sciences économiques,bien-être |
| Date: | 2021–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03375656&r= |
| By: | Morone, Andrea; Santorsola, Marco; Tiranzoni, Paola |
| Abstract: | This work building on well-established economics literature on TV game shows aims, in an innovative manner, to provide further noteworthy insights. We compare individual, group and couple choices in the risky choice context provided by the Italian version of the international TV show “Deal or no Deal”. After analyzing contestant’s behaviour during the standard edition episodes plus two special editions we calculate a risk index showing that couples (affianced couples) display a greater degree of risk aversion while no statically significant difference is present between individuals’ and groups’ actions. This paper could be a starting point for future research investigating the rationale behind such conduct to examine whether such pattern would also be observed in a context different from that of TV game shows (e.g. financial decisions). |
| Keywords: | Deal or no Deal, risky context, risk aversion, group and individual risk preferences, TV game shows |
| JEL: | C9 |
| Date: | 2021–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110618&r= |
| By: | Santorsola, Marco; Caferra, Rocco; Morone, Andrea |
| Abstract: | During the last decade, scholars and policy makers have increasingly concentrated on investors’ excessive risk taking. By conducting an online pair-wise lottery choice experiment, we assess for variations in the level of risk taken when altering the research frame. For instance, in our experimental treatments we affect subjects’ awareness about the risk-taking decision by displaying or not displaying (financial) risk warning messages with different intensity. We also carry out additional robustness checks searching for possible relations between risk aversion, cognitive ability and questionnaire- based risk aversion scores. Our results provide statical evidence for the efficacy of informative and very salient messages in mitigating risky decision, offering several policy implications. The intuitions, deriving from a 177-subject sample, could indeed provide useful insights for designing effective risk reduction policies and maybe be applicable not only to a financial market context but also by extension to other risk-taking activities, i.e., online betting and gambling. |
| Keywords: | Individual decision-making; risk; experimental economics; Information effect; Finance. |
| JEL: | C9 |
| Date: | 2021–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110619&r= |
| By: | Domenico Buccella; Luciano Fanti; Luca Gori |
| Abstract: | This work revisits the R&D model à la D’Aspremont –Jacquemin (1988) (AJ) in a context with socially responsible firms. In the traditional model firms invest but, in equilibrium, they are cast into a prisoner’s dilemma. Socially responsible firms also invest in equilibrium. However, provided that firms consider sufficiently high consumer welfare, to invest is firms’ utility-enhancing: the prisoner’s dilemma vanishes, and the R&D investment is the firms’ Pareto-efficient choice. That is, while in the traditional AJ context to invest in R&D is Pareto-inferior for the whole society, when firms are of CSR type their R&D innovation becomes a Pareto-superior choice. |
| Keywords: | Process innovation; Corporate social reponsibility; Nash equilibrium; Social welfare |
| JEL: | D43 L13 O31 |
| Date: | 2021–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2021/282&r= |
| By: | Gaurab Aryal; Hanna Charankevich; Seungwon Jeong; Dong-Hyuk Kim |
| Abstract: | We propose an empirical method to analyze data from first-price procurements where bidders are asymmetric in their risk-aversion (CRRA) coefficients and distributions of private costs. Our Bayesian approach evaluates the likelihood by solving type-symmetric equilibria using the boundary-value method and integrates out unobserved heterogeneity through data augmentation. We study a new dataset from Russian government procurements focusing on the category of printing papers. We find that there is no unobserved heterogeneity (presumably because the job is routine), but bidders are highly asymmetric in their cost and risk-aversion. Our counterfactual study shows that choosing a type-specific cost-minimizing reserve price marginally reduces the procurement cost; however, inviting one more bidder substantially reduces the cost, by at least 5.5%. Furthermore, incorrectly imposing risk-neutrality would severely mislead inference and policy recommendations, but the bias from imposing homogeneity in risk-aversion is small. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.04626&r= |
| By: | Navid Mojir (Yale School of Management); K. Sudhir (Cowles Foundation and Yale School of Management) |
| Abstract: | The paper develops the ï¬ rst structural model of organizational buying to study innovation diffusion in a B2B market. Our model is particularly applicable for routinized exchange relationships, whereby centralized buyers periodically evaluate and choose contracts, then downstream users or- der items on contracted terms. The model captures different utility tradeoffs for users and buyers while accounting for how buyer and user choices interact to impact user adoption/usage and buyer contracting. Further, the paper considers the dynamics induced by share of wallet (SOW) pricing contracts, commonly used in B2B markets to reward customer loyalty with discounts for buying more than a threshold share from a supplier. We assemble novel panel data on surgeon usage, SOW contracts, contract switching, and hospital characteristics. We ï¬ nd two segments of hospitals in terms of the relative power of surgeons and buyers: a buyer-centric and a surgeon-centric segment. Further, innovations diffuse faster in teaching hospitals and when surgeries are concentrated among a few surgeons. Finally, we answer such questions as: Should the marketer focus on push (buyer-focused) or pull (user-focused) strategies? Do SOW contracts hurt the innovations of smaller ï¬ rms? Surprisingly, we ï¬ nd that the contracts can help speed the diffusion of major innovations from smaller players. |
| Keywords: | Organizational Buying Behavior, healthcare marketing, B2B Markets, B2B Innovation, New Product Diffusion, New Product Adoption |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2315&r= |
| By: | Yuanchen Yang |
| Abstract: | We differentiate the effects of passive institutional investors, which mainly refer to index funds that adopt a passive portfolio strategy, on firms’ innovation activities and innovation strategies. Relying on plausibly exogenous variation in passive institutional ownership generated by Russell 1000/2000 index reconstitutions, we find that, with larger passive institutional ownership, while firms’ countable innovation activities increase, they shift their innovation strategies by focusing more on exploitation of existing knowledge instead of exploring new technology. Enhanced monitoring by passive institutional investors through active votes could explain their positive effects on firms’ innovation activities. Increasing risk aversion on the part of passive institutional investors appears the underlying force that drives firms’ shift to incremental innovation. Our paper uncovers a subtle relation between institutional investors and innovation, which is largely ignored by earlier studies. |
| Date: | 2021–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/158&r= |
| By: | Ren\'e A\"id; Ofelia Bonesini; Giorgia Callegaro; Luciano Campi |
| Abstract: | We propose a model where a producer and a consumer can affect the price dynamics of some commodity controlling drift and volatility of, respectively, the production rate and the consumption rate. We assume that the producer has a short position in a forward contract on \lambda units of the underlying at a fixed price F, while the consumer has the corresponding long position. Moreover, both players are risk-averse with respect to their financial position and their risk aversions are modelled through an integrated-variance penalization. We study the impact of risk aversion on the interaction between the producer and the consumer as well as on the derivative price. In mathematical terms, we are dealing with a two-player linear-quadratic McKean-Vlasov stochastic differential game. Using methods based on the martingale optimality principle and BSDEs, we find a Nash equilibrium and characterize the corresponding strategies and payoffs in semi-explicit form. Furthermore, we compute the two indifference prices (one for the producer and one for the consumer) induced by that equilibrium and we determine the quantity \lambda such that the players agree on the price. Finally, we illustrate our results with some numerics. In particular, we focus on how the risk aversions and the volatility control costs of the players affect the derivative price. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.04391&r= |
| By: | AKIN, ZAFER; ISSABAYEV, MURAT; RIZVANOGHLU, ISLAM |
| Abstract: | This paper studies the strategic behaviour of professional boxers in choosing the opponent and sharing the revenues generated by the fight. In professional boxing, a higher-ranked boxer has an upper hand in choosing his opponent among many challengers varying in popularity and strength. We build a three-stage model of a professional boxing fight/bout between the chooser and the one of his challengers to examine the strategic incentives of a chooser in sharing the purse in Nash Bargaining framework and exerting proper level of effort within a contest theory model. More importantly, we endogenize the choice of the opponent and thus the purse to be generated by the bout. We characterize the factors affecting the choice of an “optimal” opponent and the effort level exerted by the chooser and the opponent. One interesting result of the paper is that an older chooser who is ready to cash in his reputation tends to choose a stronger opponent, but puts little effort into the fight. On the other hand, a young rising “star” in the boxing market prefers a match against weaker opponents in order to minimize his risk of losing and to maximize his record of the “winning” outcomes along with market values. |
| Keywords: | Boxing, incentives, contests, opponent choice, bargaining, game theory |
| JEL: | C7 |
| Date: | 2021–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110595&r= |
| By: | Mohtashami, Toktam |
| Keywords: | Crop Production/Industries |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae21:315889&r= |
| By: | Grimaud, Alex |
| Abstract: | This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations. |
| Keywords: | Adaptive learning, precautionary saving, restricted perception equilibrium heterogeneous expectations, heterogeneous agents |
| JEL: | E25 E31 E52 |
| Date: | 2021–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110651&r= |