nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2021‒12‒20
fourteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Rational AI: A comparison of human and AI responses to triggers of economic irrationality in poker By C. Grace Haaf; Devansh Singh; Cinny Lin; Scofield Zou
  2. Motivated Belief Updating and Rationalization of Information By Christoph Drobner; Sebastian J. Goerg
  3. Identifying Dynamic Discrete Choice Models with Hyperbolic Discounting By Taiga Tsubota
  4. Obstacles to Redistribution Through Markets and One Solution By Roy Allen; John Rehbeck
  5. Functional Model of Residential Consumption Elasticity under Dynamic Tariffs By Kamalanathan Ganesan; Jo\~ao Tom\'e Saraiva; Ricardo J. Bessa
  6. Trial to count the discounted envy; Evaluation and Compensation By Hobara, Nobuhiro
  7. Gene-Edited or Genetically Modified Food? the Impacts of Risk and Ambiguity on Chinese Consumers’ Willingness to Pay By Yu, Jianyu
  8. The Poverty-Adjusted Life Expectancy index: a consistent aggregation of the quantity and the quality of life By Jean-Marie Baland; Guilhem Cassan; Benoit Decerf
  9. Precautionary motives with multiple instruments By Heinzel, Christoph; Peter, Richard
  10. Estimating discrete choice experiments : theoretical fundamentals By Benoit Chèze; Charles Collet; Anthony Paris
  11. Asset Prices and Business Cycles with Liquidity Shocks By Mahdi Nezafat; Ctirad Slavik
  12. Individual decision-making experiment with risk and intertemporal choice: a replication study By Morone, Andrea; Casamassima, Alessia; Cascavilla, Alessandro
  13. Framing energy choices in consumer decision-making Evidence from a random experiment in Sweden By Gustafsson, Peter; Nilsson, Peter; David, Lucinda; Marañon, Antonia
  14. Maximizing revenue in the presence of intermediaries By Gagan Aggarwal; Kshipra Bhawalkar; Guru Guruganesh; Andres Perlroth

  1. By: C. Grace Haaf; Devansh Singh; Cinny Lin; Scofield Zou
    Abstract: Humans exhibit irrational decision-making patterns in response to environmental triggers, such as experiencing an economic loss or gain. In this paper we investigate whether algorithms exhibit the same behavior by examining the observed decisions and latent risk and rationality parameters estimated by a random utility model with constant relative risk-aversion utility function. We use a dataset consisting of 10,000 hands of poker played by Pluribus, the first algorithm in the world to beat professional human players and find (1) Pluribus does shift its playing style in response to economic losses and gains, ceteris paribus; (2) Pluribus becomes more risk-averse and rational following a trigger but the humans become more risk-seeking and irrational; (3) the difference in playing styles between Pluribus and the humans on the dimensions of risk-aversion and rationality are particularly differentiable when both have experienced a trigger. This provides support that decision-making patterns could be used as "behavioral signatures" to identify human versus algorithmic decision-makers in unlabeled contexts.
    Date: 2021–11
  2. By: Christoph Drobner (Technical University Munich (TUMCS)); Sebastian J. Goerg (Technical University Munich (TUMCS, SOM))
    Abstract: We study belief updating about relative performance in an ego-relevant task. Manipulating the perceived 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, who received more bad signals, downplay the ego-relevance of the task. Taken together, these  findings suggest that subjects use two alternative strategies to protect their ego when presented with objective information.
    Keywords: Motivated beliefs; Optimistic belief updating; Direct belief utility; Bayes' rule; Ex-post rationalization.
    JEL: C91 D83 D84
    Date: 2021–12
  3. By: Taiga Tsubota
    Abstract: We study identification of dynamic discrete choice models with hyperbolic discounting. We show that the standard discount factor, present bias factor, instantaneous utility functions, and the perceived conditional choice probabilities for the sophisticated agent are point-identified in a finite horizon model. The main idea to achieve identification is to exploit variation of the observed conditional choice probabilities over time. We also show that, if the data have an additional state variable, the identification result is still valid with less severe requirements for the number of time periods in the data. We also present the estimation method and demonstrate a good performance of the estimator by simulation.
    Date: 2021–11
  4. By: Roy Allen; John Rehbeck
    Abstract: Dworczak et al. (2021) study when certain market structures are optimal in the presence of heterogeneous preferences. A key assumption is that the social planner knows the joint distribution of the value of the good and marginal value of money. This paper studies whether relevant features of this distribution are identified from choice data. We show that the features of the distribution needed to characterize optimal market structure cannot be identified when demand is known for all prices. While this is a negative result, we show that the distribution of good value and marginal utility of money is fully identified when there is an observed measure of quality that varies. Thus, while Dworczak et al. (2021) abstract from quality, we show how including quality is crucial for potential applications.
    Date: 2021–11
  5. By: Kamalanathan Ganesan; Jo\~ao Tom\'e Saraiva; Ricardo J. Bessa
    Abstract: One of the major barriers for the retailers is to understand the consumption elasticity they can expect from their contracted demand response (DR) clients. The current trend of DR products provided by retailers are not consumer-specific, which poses additional barriers for the active engagement of consumers in these programs. The elasticity of consumers demand behavior varies from individual to individual. The utility will benefit from knowing more accurately how changes in its prices will modify the consumption pattern of its clients. This work proposes a functional model for the consumption elasticity of the DR contracted consumers. The model aims to determine the load adjustment the DR consumers can provide to the retailers or utilities for different price levels. The proposed model uses a Bayesian probabilistic approach to identify the actual load adjustment an individual contracted client can provide for different price levels it can experience. The developed framework provides the retailers or utilities with a tool to obtain crucial information on how an individual consumer will respond to different price levels. This approach is able to quantify the likelihood with which the consumer reacts to a DR signal and identify the actual load adjustment an individual contracted DR client provides for different price levels they can experience. This information can be used to maximize the control and reliability of the services the retailer or utility can offer to the System Operators.
    Date: 2021–11
  6. By: Hobara, Nobuhiro
    Abstract: No envy or envy is the important object or problem the social choice researcher often study and many researcher try to decrease the envy existed in economy while keeping in mind the problem of social welfare. Feldman and Kirman(1974) try to count the number of envy of each subject or in economy directly . Their method is tractable in term of evaluating the degree of fairness and comparing the degree of fairness or envy among economies. But we consider that their method has serious problem. In short, they treat the envy of the richest subject equally with that of the poorest subject. So, we try to modify Feldman and Kirman (1974) from the point of justice and we introduce such a discounted envy that we discount envy each subject feel by the envy felt by the other subject, and we reconsider the problem of evaluation and compensation.
    Keywords: envy(no-envy) fairness, extended utility function, distribution, evaluation
    JEL: H89 I30 D39 D63
    Date: 2021–12
  7. By: Yu, Jianyu
    Keywords: Risk and Uncertainty
    Date: 2021–08
  8. By: Jean-Marie Baland (Center for Research in the Economics of Development, University of Namur); Guilhem Cassan; Benoit Decerf
    Abstract: Poverty and mortality are arguably the two major sources of well-being losses. Most mainstream measures of human development capturing these two dimensions aggregate them in an ad-hoc and controversial way. In this paper, we propose a new indicator aggregating the poverty and the mortality observed in a given period, which we call the poverty-adjusted life-expectancy (PALE). This indicator is based on a single normative parameter that transparently captures the trade-off between well-being losses from being poor or from being dead. We first show that PALE follows naturally from the expected life-cycle utility approach a la Harsanyi (1953). Empirically, we then proceed to between countries or across time comparisons and focus on those situations in which poverty and mortality provide conflicting evaluations. Once we assume that being poor is (at least weakly) preferable to being dead, we show that about a third of these conflicting comparisons can be unambiguously ranked by PALE. Finally, we show that our index naturally defines a new and simple index of multidimensional poverty, the expected deprivation index, which aggregates poverty and premature mortality in a consistent way.
    Date: 2021–10
  9. By: Heinzel, Christoph; Peter, Richard
    Abstract: Using a unified approach, we show how precautionary saving, self-protection and self-insurance are jointly determined by risk preferences and the preference over the timing of uncertainty resolution. We cover higher-order risk effects and examine both risk averters and risk lovers. When decision-makers use several instruments simultaneously to respond to income risk, substitutive interaction effects arise. We quantify precautionary and substitution effects numerically and discuss the role of instrument interaction for the inference of preference parameters from precautionary motives. Instruments can differ substantially in the size of the precautionary motive and in the susceptibility to substitution effects. This affects their suitability for the identification of precautionary preferences.
    Keywords: Consumer/Household Economics, Risk and Uncertainty
    Date: 2021–12–17
  10. By: Benoit Chèze (IFPEN - IFP Energies nouvelles - IFPEN - IFP Energies nouvelles, EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Charles Collet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique); Anthony Paris (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - Université de Tours - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This working paper overviews theoretical foundations and estimators derived from econometric models used to analyze stated choices proposed in Discrete Choice Experiment (DCE)surveys. Discrete Choice Modelling is adapted to the case where the variable to be explained is a qualitative variable which cannot be ranked in relation to each other. A situation which occurs in many cases in everyday life as people often have to choose only one alternative among a proposed set of different ones in many fields (early in the morning, just think about how you pick clothes for instance). DCE is a Stated Preference method in which preferences are elicited through repeated fictional choices, proposed to a sample of respondents. Compared to Revealed Preference methods, DCEs allow for an ex ante evaluation of public policies that do not yet exists.
    Keywords: Revealed preference theory,Stated Preference / Stated Choice methods,Discrete Choice Modelling,Discrete Choice Experiment
    Date: 2021–04–12
  11. By: Mahdi Nezafat; Ctirad Slavik
    Abstract: We develop a production based asset pricing model with financially constrained firms to explain the observed high equity premium and low risk-free rate volatility. Investment opportunities are scarce and firms face productivity and liquidity shocks. A negative liquidity shock forces firms to liquidate a fraction of their assets. We calibrate the model to U.S. data and find that it generates an equity premium and a level and volatility of risk-free rate comparable to those observed in the data. The model also fits key aspects of the behavior of aggregate quantities, in particular, the volatility of aggregate consumption and investment.
    Keywords: general equilibrium; business cycles; production based asset pricing; equity premium and risk-free rate puzzles;
    JEL: E20 E32 G12
    Date: 2021–11
  12. By: Morone, Andrea; Casamassima, Alessia; Cascavilla, Alessandro
    Abstract: We replicate the experiment proposed by Lisa R. Anderson and Sarah L. Stafford (2009) by conducting it through the Instagram platform. The structure of questionnaire is the same as the one of the original experiment inasmuch subjects might choose between two options that differ in resolution timing. According to the experimental results, we show that the percentage of subjects choosing later option increases as the value of the later option increases, and the percentage of subjects choosing later option is smaller the longer the temporal delay between two options. We found that risk does not make subjects less patient and there are interactions between risk and the length temporal delay.
    Keywords: Intertemporal decision-making; Risk; Intertemporal choice; Experiment.
    JEL: C91 D8
    Date: 2020–02
  13. By: Gustafsson, Peter (Lund University); Nilsson, Peter (GfK); David, Lucinda (CIRCLE, Lund University); Marañon, Antonia (CIRCLE, Lund University)
    Abstract: Sustainability transitions literature is largely missing the point of view of consumers. This is problematic in efforts to understand how sustainable forms of energy diffuses where consumers are understood as active players in embedding energy efficient technologies in their homes. It remains unclear how consumers make energy-relevant decisions and what constitutes this decision-making process. We address this gap by conducting a random experiment asking consumers to make choices regarding solar energy technologies based on a set of options. Options are framed in either a subtractive or additive way to test how consumers process these choices, whether the type of framing matters in encouraging pro-solar energy behavior, and which solar technologies are preferred. We hypothesize that subtractive framing of energy-relevant choices leads to more options being selected than additive framing, that the type of option framing matters in shaping consumer preferences, and that the framing affects the transition probabilities in the decision-making process. Results show that consumers are susceptible to option framing when making energy-relevant decisions. Respondents were concerned primarily with costs when options were framed additively but exhibited decision difficulties and more pro-solar energy transition behavior when options were framed subtractively. This paper demonstrates the sequential steps in decision-making under subtractive framing, which induces a willingness in consumers to embed more solar energy technologies into their households despite the cost, as opposed to additive framing. This paper contributes a representation of the cognitive process of energy relevant decision-making, empirical evidence on the potentiality of nudging consumers towards more pro-solar energy transition behavior, and the importance of framing tools in encouraging this behavior.
    Keywords: additive and subtractive option framing; experimental design; Markov chain; final state distribution; transition probability; distance from initial model; anchoring
    JEL: C12 C93 D12 D81
    Date: 2021–12–10
  14. By: Gagan Aggarwal; Kshipra Bhawalkar; Guru Guruganesh; Andres Perlroth
    Abstract: We study the mechanism design problem of selling $k$ items to unit-demand buyers with private valuations for the items. A buyer either participates directly in the auction or is represented by an intermediary, who represents a subset of buyers. Our goal is to design robust mechanisms that are independent of the demand structure (i.e. how the buyers are partitioned across intermediaries), and perform well under a wide variety of possible contracts between intermediaries and buyers. We first study the case of $k$ identical items where each buyer draws its private valuation for an item i.i.d. from a known $\lambda$-regular distribution. We construct a robust mechanism that, independent of the demand structure and under certain conditions on the contracts between intermediaries and buyers, obtains a constant factor of the revenue that the mechanism designer could obtain had she known the buyers' valuations. In other words, our mechanism's expected revenue achieves a constant factor of the optimal welfare, regardless of the demand structure. Our mechanism is a simple posted-price mechanism that sets a take-it-or-leave-it per-item price that depends on $k$ and the total number of buyers, but does not depend on the demand structure or the downstream contracts. Next we generalize our result to the case when the items are not identical. We assume that the item valuations are separable. For this case, we design a mechanism that obtains at least a constant fraction of the optimal welfare, by using a menu of posted prices. This mechanism is also independent of the demand structure, but makes a relatively stronger assumption on the contracts between intermediaries and buyers, namely that each intermediary prefers outcomes with a higher sum of utilities of the subset of buyers represented by it.
    Date: 2021–11

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