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on Utility Models and Prospect Theory |
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Issue of 2021‒12‒13
nine papers chosen by |
| By: | Norio Takeoka (Department of Economics, Hitotsubashi University); Takashi Ui (Department of Economics, Hitotsubashi University) |
| Abstract: | A decision problem under uncertainty is often given with a piece of objective but imprecise information about the states of the world such as in the Ellsberg urn. By incorporating such information into the smooth ambiguity model of Seo (2009), we characterize a class of smooth ambiguity representations whose second-order beliefs are consistent with the objective information. As a corollary, we provide an axiomatization for the second-order expected utility, which has been studied by Nau (2001), Neilson (2009), Grant, Polak, and Strzalecki (2009), Strzalecki (2011), and Ghirardato and Pennesi (2019). In our model, attitude toward uncertainty can be disentangled from a perception about uncertainty and connected with attitude toward reduction of compound lotteries. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:037&r= |
| By: | Zixin Feng; Dejian Tian |
| Abstract: | In this paper, we investigate the consumption-investment problem for an investor with Epstein-Zin utility under general constraints. In an incomplete market, we impose closed, not necessarily convex, constraints on strategies and characterize optimal consumption and investment strategies via backward stochastic differential equations (BSDEs). Due to the stochastic environment of the market, the solution to this BSDE is unbounded and thereby the BMO argument breaks down. We use the Lyapunov function to show a certain local martingale is a martingale and complete our proof by the martingale optimal principle. Finally, an explicit model is given to illustrate the main result. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.09032&r= |
| By: | Harin, Alexander |
| Abstract: | A systematic introduction to sub-interval images (or SI-images or S-IIs) is presented here. General outlook of possible use of the SI-analysis for Big Data is given. Basic notions of S-IIs are formulated including cuboids of gravity and sub-interval copies of databases. Two concepts of SII-indexing are proposed for Big Data databases. The S-IIs can be used in, e.g., search, and recognition in databases in, e.g., accounting and audit, micro- and macroeconomics, especially in Big Data databases. |
| Keywords: | mathematic; databases; Big Data; utility theory; prospect theory; economics; |
| JEL: | C02 C1 D8 |
| Date: | 2021–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110782&r= |
| By: | Arvind S. Menon; Prashanth L. A.; Krishna Jagannathan |
| Abstract: | Utility-Based Shortfall Risk (UBSR) is a risk metric that is increasingly popular in financial applications, owing to certain desirable properties that it enjoys. We consider the problem of estimating UBSR in a recursive setting, where samples from the underlying loss distribution are available one-at-a-time. We cast the UBSR estimation problem as a root finding problem, and propose stochastic approximation-based estimations schemes. We derive non-asymptotic bounds on the estimation error in the number of samples. We also consider the problem of UBSR optimization within a parameterized class of random variables. We propose a stochastic gradient descent based algorithm for UBSR optimization, and derive non-asymptotic bounds on its convergence. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.08805&r= |
| By: | Agarwal, Nikhil (MIT); Somaini, Paulo (Stanford University) |
| Abstract: | Empirical models play a distinctive role in the study of matching markets. They provide a quantitative framework for measuring heterogeneity in preferences for schools (Hastings et al., 2009), comparing school assignment mechanisms (Abdulkadiroglu et al., 2017; Agarwal and Somaini, 2018; Calsamiglia et al., 2020), understanding preferences in the marriage market (Chiappori et al., 2012), and measuring the effects of market power in the medical residence match (Agarwal, 2015). The approach taken by these papers is based on first estimating the preferences of the agents in these markets and then using those estimates to make economic conclusions. This chapter provides a unified framework for analyzing agents’ preferences in empirical matching models with non-transferable utility. Our objective is to provide a roadmap of the existing literature and highlight avenues for future research. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3982&r= |
| By: | Francesco Menoncin; Paolo Panteghini; Luca Regis |
| Abstract: | We model a risk-averse firm owner who wants to maximize the intertemporal expected utility of firm’s dividends. The optimal dynamic control problem is characterized by two stochastic state variables: the equity value, and profitability (ROA) of the _rm. According to the empirical evi-dence, we let profitability follow a mean reverting process. The problem is solved in a quasi-explicit form by computing both the optimal dividend and the optimal debt. Finally, we calibrate the model to actual US data and check both the properties of the solution and its sensitivity to the model parameters. In particular, our results show that the optimal dividend is smooth over time and that leverage is predominantly constant over time. Neither asymmetric information nor frictions are necessary to obtain these findings. |
| Keywords: | dividend policy, capital structure, profit mean-reversion, closed-form, stochastic optimization |
| JEL: | H25 G32 G35 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9407&r= |
| By: | Blondel, Serge (Université d'Angers); Langot, François (University of Le Mans); Mueller, Judith E. (Ecole des Hautes Etudes en Santé Publique); Sicsic, Jonathan (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 |
| JEL: | D81 I12 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14823&r= |
| By: | Adema, Joop (University of Munich); Nikolka, Till (German Youth Institute (DJI)); Poutvaara, Panu (University of Munich); Sunde, Uwe (University of Munich) |
| Abstract: | We exploit the unique design of a repeated survey experiment among students in four countries to explore the stability of risk preferences in the context of the COVID-19 pandemic. Relative to a baseline before the pandemic, we find that self-assessed willingness to take risks decreased while the willingness to take risks in an incentivized lottery task increased, for the same sample of respondents. These findings suggest domain specificity of preferences that is partly reflected in the different measures. |
| Keywords: | stability of risk preferences, measurement of risk aversion, COVID-19 |
| JEL: | D12 D91 G50 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14755&r= |
| By: | Mr. Francisco Roch; Francisco Roldán |
| Abstract: | We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design. |
| Keywords: | Sovereign debt; default; state-contingent debt instruments; robust control; ambiguity premia; probability distortion; robust lender; State-contingent debt; ambiguity aversion; debt structure; threshold bond; Bonds; Debt default; Rational expectations; Asset prices |
| Date: | 2021–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/076&r= |