nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒02‒14
fourteen papers chosen by

  1. Modeling ex-ante risk premia in the oil market By Georges Prat; Remzi Uctum
  2. Ever since Allais By Aluma Dembo; Shachar Kariv; Matthew Polisson; John Quah
  3. Cost-utility analysis of normothermic and hypothermic exsitu machine perfusion systems in liver transplantation By Zimmermann, Julia; Carter, Alex
  4. Stable marriage, household consumption and unobserved match quality By Martin Browning; Laurens Cherchye; Thomas Demuynck; Bram De Rock; Frederic Vermeulen
  5. Altruism Networks, Income Inequality, and Economic Relations By Yann Bramoullé; Rachel E Kranton
  6. An anticipative Markov modulated market By D'Auria, Bernardo; Salmeron Garrido, Jose Antonio
  8. Longing for which home: Evidence from global aspirations to stay, return or migrate onwards By Bekaert, Els; Constant, Amelie F.; Foubert, Killian; Ruyssen, Ilse
  9. Gender differences in investments and risk preferences By Holden, Stein T.; Tilahun, Mesfin
  10. Fear and Economic Behavior By Andersson, Lina
  11. Choice with endogenous categorization By Ellis, Andrew; Masatlioglu, Yusufcan
  12. L'évaluation économique en santé au prisme de la typologie des épistémès de Foucault By Clémence Thebaut
  13. A Behavioral Heterogeneous Agent New Keynesian Model By Oliver Pfäuti; Fabian Seyrich
  14. Wage Risk and Portfolio Choice: The Role of Correlated Returns By Johannes König; Maximilian Longmuir

  1. By: Georges Prat (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Remzi Uctum (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Using survey-based data we show that oil price expectations are not rational, implying that the ex-ante premium is a more relevant concept than the widely popular expost premium. We propose for the 3-and 12-month horizons a portfolio choice model with risky oil assets and a risk-free asset. At the maximized expected utility the risk premium is defined as the risk price times the expected oil return volatility. A state-space model, where the risk prices are represented as stochastic unobservable components and where expected volatilities depend on historical squared returns, is estimated using Kalman filtering. We find that the representative investor is risk seeking at short horizons and risk averse at longer horizons. We examine the economic factors driving risk prices whose signs are shown to be consistent with the predictions of the prospect theory. An upward sloped term structure of oil risk premia prevails in average over the period.
    Keywords: oil market,oil price expectations,ex-ante risk premium JEL classification : D81
    Date: 2021
  2. By: Aluma Dembo (Institute for Fiscal Studies and University of Oxford); Shachar Kariv (Institute for Fiscal Studies); Matthew Polisson (Institute for Fiscal Studies and University of Bristol); John Quah (Institute for Fiscal Studies)
    Abstract: The Allais critique of expected utility theory (EUT) has led to the development of theories of choice under risk that relax the independence axiom, but which adhere to the conventional axioms of ordering and monotonicity. Unlike many existing labora-tory experiments designed to test independence, our experiment systematically tests the entire set of axioms, providing much richer evidence against which EUT can be judged. Our within-subjects analysis is nonparametric, using only information about revealed preference relations in the individual-level data. For most subjects we ?nd that departures from independence are statistically signi?cant but minor relative to departures from ordering and/or monotonicity.
    Date: 2021–06–14
  3. By: Zimmermann, Julia; Carter, Alex
    Keywords: hepato-pancreato-biliary surgery; OUP deal
    JEL: J1
    Date: 2022–02–01
  4. By: Martin Browning (Institute for Fiscal Studies and University of Oxford); Laurens Cherchye (Institute for Fiscal Studies and Katholieke Universiteit Leuven); Thomas Demuynck (Institute for Fiscal Studies); Bram De Rock (Institute for Fiscal Studies and Université libre de Bruxelles); Frederic Vermeulen (Institute for Fiscal Studies and University of Leuven)
    Abstract: We present a methodology for the structural empirical analysis of household consumption and time use behaviour under marital stability. Our approach is of the revealed preference type and non-parametric, meaning that it does not require a prior functional speci?cation of individual utilities. Without making use of the transferable utility assumption, but still allowing for monetary transfers, our method can identify individuals’ unobserved match qualities and quantify them in money metric terms. We can include both preference factors, a?ecting individuals’ preferences over private and public goods, and match quality factors, driving di?erences in unobserved match quality. We demonstrate the practical usefulness of our methodology through an application to the Belgian MEqIn data. Our results reveal intuitive patterns of unobserved match quality that allow us to rationalise both the observed matches and the within-household allocations of time and money.
    Date: 2021–10–05
  5. By: Yann Bramoullé (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Rachel E Kranton (Duke University, Durham, US)
    Abstract: What patterns of economic relations arise when people are altruistic rather than strategically self-interested? This paper introduces an altruism network into a simple model of choice among partners for economic activity. With concave utility, agents effectively become inequality averse towards friends and family. Rich agents preferentially choose to work with poor friends despite productivity losses. Hence, network inequality-the divergence in incomes within sets of friends and family-is key to how altruism shapes economic relations and output. Skill homophily also plays a role; preferential contracts and productivity losses decline when rich agents have poor friends with requisite skills.
    Date: 2022–02
  6. By: D'Auria, Bernardo; Salmeron Garrido, Jose Antonio
    Abstract: A Markovian modulation captures the trend in the market and influences the market coefficients accordingly. The different scenarios presented by the market are modeled as the distinct states of a discrete-time Markov chain. In our paper, we assume the existence of such modulation in a market and, as a novelty, we assume that it can be anticipative with respect to the future of the Brownian motion that drives the dynamics of the risky asset. By employing these own techniques of enlargement of filtrations, we solve an optimal portfolio utility problem in both a complete and an incomplete market. Many examples of anticipative Markov chains are presented for which we compute the additional gain of the investor who has a more accurate information
    Keywords: Optimal Portfolio; Markov Modulated; Regime-Switching; Jacod’s hypothesis; Anticipative Information; Value of the information
    Date: 2022–02–09
  7. By: Gérard Mondello (UCA - Université Côte d'Azur)
    Abstract: This paper studies the impact of the reliability of information sources on choices under ambiguity. Using the Ellsberg's (1961) framework it studies two conjectures. First, the conditions of appearance of the Ellsberg paradox when the information source offers two probable proportions of red and black balls in two urns. Second, the consequence on choices of a non-reliable information source. This source proposes a unique proportion of red and black balls against an unknown one (inside box 1).
    Keywords: Uncertainty theory,decision theory,ambiguity aversion,Information I1,I18,I19,D80,D81,D83
    Date: 2021–12–26
  8. By: Bekaert, Els (UNU-CRIS, Ghent University, Department of Economics); Constant, Amelie F. (UNU-MERIT, GLO, CESifo and Princeton University); Foubert, Killian (UNU-CRIS, Ghent University, Department of Economics); Ruyssen, Ilse (UNU-CRIS, Ghent University, Department of Economics)
    Abstract: Aspirations provide the underlying dynamics of the behavior of individuals whether they are realized or not. Knowledge about the characteristics and motives of those who aspire to leave the host country is key for both host and home countries to formulate appropriate and effective policies in order to keep their valued immigrants or citizens and foster their (re-)integration. Based on unique individual-level Gallup World Polls data, a random utility model, and a multinomial logit we model the aspirations or stated preferences of immigrants across 138 countries worldwide. Our analysis reveals selection in characteristics, a strong role for soft factors like social ties and sociocultural integration, and a faint role for economic factors. Changes in circumstances in the home and host countries are also important determinants of aspirations. Results differ by the host countries’ level of economic development.
    Keywords: Economics of Immigrants, Geographic Labor Mobility, Public Policy, Micro-economic Behavior, International Migration, Large Data Sets, Modeling and Analysis
    JEL: J15 J61 J68 D01 F22 C55 O15
    Date: 2021–09–14
  9. By: Holden, Stein T. (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tilahun, Mesfin (Centre for Land Tenure Studies, Norwegian University of Life Sciences)
    Abstract: We analyze individual investment behavior among 822 young men and women that are members of 111 formal business groups in northern Ethiopia. We collected baseline data and investment data one year later combined with incentivized field experiments to obtain dis-aggregated risk preference data. We find that business women on average invest significantly less at individual level than business men but Cohen’s d values for the gender difference are moderate in size. Women are found to have higher Constant Relative Risk Aversion coefficients, to be more loss averse, but also to be more optimistic in their expectations than men. Women were also poorer in non-land assets, came from more land-poor parents and had lower incomes. The gender differences in risk attitudes and baseline endowments could explain some of but not all of the gender differences in investments.
    Keywords: Gender difference; Individual investment; Risk preferences; Prospect theory; Cohen’s d; Business groups; Northern Ethiopia
    JEL: C93 D90
    Date: 2022–01–25
  10. By: Andersson, Lina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Fear is an important factor in decision-making under risk and uncertainty. Psychology research suggests that fear influences one’s risk attitude and fear may have important consequences for decisions concerning for example investments, crime, conflicts, and politics. I model strategic interactions between players who can be in either a neutral or a fearful state of mind. A player’s state of mind determines his or her utility function. The two main assumptions are that (i) fear is triggered by an increase in the probability or cost of negative outcomes and (ii) a player in the fearful state is more risk averse. A player’s beliefs over the probability and cost of negative outcomes determine how the player transitions between the states of mind. I use psychological game theory to analyze the role of fear in three applications, a robbery game, a bank run game, and a public health intervention.
    Keywords: emotions; fear; risk aversion; psychological game theory
    JEL: C72 D01 D91
    Date: 2022–02
  11. By: Ellis, Andrew; Masatlioglu, Yusufcan
    Abstract: We propose and axiomatize the categorical thinking model (CTM) in which the framing of the decision problem affects how agents categorize alternatives, that in turn affects their evaluation of it. Prominent models of salience, status quo bias, loss-aversion, inequality aversion, and present bias all fit under the umbrella of CTM. This suggests categorization is an underlying mechanism of key departures from the neoclassical model of choice. We specialize CTM to provide a behavioural foundation for the salient thinking model of Bordalo et al. (2013, Journal of Political Economy, 121, 803–843) that highlights its strong predictions and distinctions from other models.
    Keywords: choice; categorization; salience; SES-1628883; OUP deal
    JEL: D01 D11 D80 D90
    Date: 2022–01–10
  12. By: Clémence Thebaut (NET - Neuroépidémiologie Tropicale - CHU Limoges - Institut d'Epidémiologie Neurologique et de Neurologie Tropicale - INSERM - Institut National de la Santé et de la Recherche Médicale - GEIST - Institut Génomique, Environnement, Immunité, Santé, Thérapeutique - UNILIM - Université de Limoges, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique, PSL - Université Paris sciences et lettres, UNILIM - Université de Limoges)
    Abstract: This article is part of a research project which seeks to draw on the methods and tools put forward by Michel Foucault to shed light on all areas of discussion concerning the economic assessment of health. It examines the epistemological basis of preference elicitation methods, based on welfare economics, which are used today to assess the benefits of health care. To do so, this research draws on Foucault's episteme set out in The Order of things. More specifically the article considers that the rejection of interpersonal comparisons that foreshadowed the marginalist revolution and the transition to ordinal measures of utility during the 19th century can be explained by the shift from the classical episteme to a modern episteme. The question of the cardinal or ordinal measurement of utility is central to the economic assessment of health care. Indeed, the methods for valuing health benefits, especially using QALYs, are similar to cardinal measures, in contrast to the paradigm of the welfare economics of which they are meant to be part.
    Abstract: Cet article s'inscrit dans le cadre d'un projet de recherche visant à mobiliser les méthodes et outils proposés par Michel Foucault pour apporter un éclairage sur un ensemble de discussions que soulève l'évaluation économique en santé. Nous nous intéressons ici à l'ancrage épistémologique des méthodes de révélation des préférences individuelles issues de l'économie du bien-être, qui sont aujourd'hui utilisées pour valoriser les bénéfices en santé, en nous appuyant sur la typologie des épistémès de Foucault dans les Mots et les choses. Plus précisément, nous envisageons que le rejet des comparaisons interpersonnelles, que préfigure la révolution marginaliste et la transition vers une mesure ordinale des utilités, s'explique par le passage d'une épistémè classique à une épistémè moderne. La question du caractère cardinal ou ordinal de la mesure de l'utilité reste centrale pour l'évaluation économique en santé. En effet, les méthodes d'évaluation des bénéfices en santé, notamment au moyen des QALY, se rapprochent d'une mesure cardinale, contrairement au paradigme de la nouvelle économie du bien-être dans lequel elle est censée s'inscrire.
    Keywords: Economie du bien-être,Evaluation économique en santé,Epistémologie,Foucault
    Date: 2021–12–21
  13. By: Oliver Pfäuti; Fabian Seyrich
    Abstract: We propose a behavioral heterogeneous agent New Keynesian model in which monetary policy is amplified through indirect general equilibrium effects, fiscal multipliers can be larger than one and which delivers empirically-realistic intertemporal marginal propensities to consume. Simultaneously, the model resolves the forward guidance puzzle, remains stable at the effective lower bound and determinate under an interest-rate peg. The model is analytically tractable and nests a wide range of existing models as special cases, none of which can produce all the listed features within one model. We extend our model and derive an equivalence result of models featuring bounded rationality and models featuring incomplete information and learning. This extended model generates hump-shaped responses of aggregate variables and a novel behavioral amplification channel that is absent in existing HANK models.
    Keywords: Behavioral Macroeconomics, Heterogeneous Households, Monetary Policy, Forward Guidance, Fiscal Policy, New Keynesian Puzzles, Determinacy, Lower Bound
    JEL: E21 E52 E62 E71
    Date: 2022–02
  14. By: Johannes König; Maximilian Longmuir
    Abstract: From standard portfolio-choice theory it is well-understood that background risk, overwhelmingly due to wage risk, is one of the central determinants of individuals’ portfolio composition: higher background risk reduces risky investments. However, if background risk is negatively correlated with financial market risk, higher background risk implies more risky investment. We quantify the influence of wage risk on German investors’ financial portfolio shares and find that an increase of the residual variance of wages by one standard deviation implies a reduction of the financial portfolio share by 3 percentage points. We do not find that the correlation of wage risk with financial market risk has a significant impact on portfolio choice and provide evidence that this may be due to a lack of salience.
    Keywords: Background risk, portfolio choice, household portfolios, investment behavior
    JEL: D12 D14 D31
    Date: 2021

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