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on Utility Models and Prospect Theory |
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Issue of 2022‒03‒21
twelve papers chosen by |
| By: | Phoebe Koundouri (Dept. of International and European Economic Studies, Athens University of Economics and Business); Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis |
| Abstract: | Ellsberg-type preferences violate one of the principles for Bayesian rationality, namely Savage's Sure Thing Principle, and are among the main empirical results against Subjective Expected Utility theory. In this paper, we propose a novel strategy for dealing with ambiguity aversion and the resulting Ellsberg-type choices. First, we identify the presence of "asymmetric information" as the main cause of ambiguity aversion. Second, we develop a solution for Ellsberg's paradox which emerges as a direct application of counterfactual thinking, implemented to the specific choice problem described by Ellsberg. Third we analyze the psychological, methodological and logical merits of the developed counterfactual strategy, and show that its application solves the problems of "error correction" and "unconceived alternatives", two of the main complaints about Bayesian Confirmation Theory. |
| Keywords: | counterfactual priors, ambiguity, ellsberg paradox |
| JEL: | C44 D81 D83 D89 |
| Date: | 2022–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:2213&r= |
| By: | Denis Shishkin (University of California San Diego); Pietro Ortoleva (Princeton University) |
| Abstract: | With common models of updating under ambiguity, new information may increase the amount of relevant ambiguity: the set of priors may "dilate." We test experimentally one sharp case: agents bet on a risky urn and get information that is truthful or not based on the draw from an Ellsberg urn. Under typical models, the set of priors should dilate, ambiguity averse agents should lower their value of bets, ambiguity seeking should increase it. Instead, we find that ambiguity averse agents do not change it, ambiguity seeking ones increase it substantially. We also test bets on ambiguous urns and find sizable reactions to ambiguous information. |
| Keywords: | Updating, Ambiguous Information, Ambiguity Aversion, Ellsberg Paradox, Maxmin Expected Utility |
| JEL: | C91 D81 D90 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2020-53&r= |
| By: | Jerez, Belén |
| Abstract: | We analyze a static competitive search model where risk-averse individuals with different wealth levels trade an indivisible good. The real estate market is a particularly relevant application. We show that the equilibrium is constrained efficient. Other properties of the equilibrium are derived, including the generalized version of the Hosios (1990) rule for this environment. Under risk aversion, buyers and sellers evaluate the trade-off between prices and trading probabilities differently as their wealth increases. As they become richer, buyers are relatively less concerned about paying higher prices and more concerned about increasing their trading probability. Conversely, richer sellers care less about increasing the probability of a sale than poorer sellers, and they care more about trading at a higher price. This results in positive sorting inequilibrium, that is, wealthier (poorer) buyers and sellers trading with each other. As transactions among wealthier agents involve higher prices, the equilibrium features frictional price dispersion. By contrast, with transferable utility, all individuals would trade at the same price, irrespectively of their wealth. |
| Keywords: | Sorting; Competitive/Directed search; Risk aversion; Wealth heterogeneity; Constrained efficiency |
| JEL: | D50 D61 D83 |
| Date: | 2022–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:34383&r= |
| By: | Yuhki Hosoya |
| Abstract: | In this paper, we show that if every consumer in a pure exchange economy has a quasi-linear utility function, then the normalized equilibrium price is unique, and it is locally stable with respect to the tatonnement process. If the dimension of the consumption space is two, then this result can be expressed by the corresponding partial equilibrium model. Our study can be seen as that extends the results in partial equilibrium theory to economies with more than two dimensional consumption space. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.04573&r= |
| By: | Andriy Norets; Kenichi Shimizu |
| Abstract: | We propose a tractable semiparametric estimation method for dynamic discrete choice models. The distribution of additive utility shocks is modeled by location-scale mixtures of extreme value distributions with varying numbers of mixture components. Our approach exploits the analytical tractability of extreme value distributions and the flexibility of the location-scale mixtures. We implement the Bayesian approach to inference using Hamiltonian Monte Carlo and an approximately optimal reversible jump algorithm from Norets (2021). For binary dynamic choice model, our approach delivers estimation results that are consistent with the previous literature. We also apply the proposed method to multinomial choice models, for which previous literature does not provide tractable estimation methods in general settings without distributional assumptions on the utility shocks. We develop theoretical results on approximations by location-scale mixtures in an appropriate distance and posterior concentration of the set identified utility parameters and the distribution of shocks in the model. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.04339&r= |
| By: | Fu Ouyang; Thomas Tao Yang |
| Abstract: | We propose a new approach to the semiparametric analysis of panel data binary choice models with fixed effects and dynamics (lagged dependent variables). The model we consider has the same random utility framework as in Honore and Kyriazidou (2000). We demonstrate that, with additional serial dependence conditions on the process of deterministic utility and tail restrictions on the error distribution, the (point) identification of the model can proceed in two steps, and only requires matching the value of an index function of explanatory variables over time, as opposed to that of each explanatory variable. Our identification approach motivates an easily implementable, two-step maximum score (2SMS) procedure -- producing estimators whose rates of convergence, in contrast to Honore and Kyriazidou's (2000) methods, are independent of the model dimension. We then derive the asymptotic properties of the 2SMS procedure and propose bootstrap-based distributional approximations for inference. Monte Carlo evidence indicates that our procedure performs adequately in finite samples. We then apply the proposed estimators to study labor market dependence and the effects of health shocks, using data from the Household, Income and Labor Dynamics in Australia (HILDA) survey. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.12062&r= |
| By: | Marina Agranov (California Institute of Technology); Pietro Ortoleva (Princeton University) |
| Abstract: | A growing literature has shown how people sometimes prefer to randomize between two options. We study how prevalent this behavior is in an experiment using a novel and simple method. We allow subjects to randomize between options in a series of questions in which one of the alternatives is fixed and the other varies, capturing the range of values for which subjects want to randomize. We find that most subjects choose to randomize in most questions. Crucially, they do so for ranges of values are ‘very large’: for example, when comparing a fixed amount $x with a lottery that pays $20 or $0 with equal chances, subjects typically randomize for all xs between $5.3 and $12. Large ranges are found in other questions as well, showing how prevalent the desire to randomization is. We connect ranges to standard choices, Certainty-Bias, and non-Monotonicity. |
| Keywords: | Preference for Randomization, Incomplete Preferences, Non-Expected Utility |
| JEL: | C91 D81 D90 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2021-72&r= |
| By: | Xiang Gao; Cody Hyndman; Traian A. Pirvu; Petar Jevti\'c |
| Abstract: | Evidence shows that the labor participation rate of retirement age cohorts is non-negligible, and it is a widespread phenomenon globally. In the United States, the labor force participation rate for workers age 75 and older is projected to be over 10 percent by 2026 as reported by the Bureau of Labor Statistics. The prevalence of post-retirement work changes existing considerations of optimal annuitization, a research question further complicated by novel factors such as post-retirement labor rates, wage rates, and capacity or willingness to work. To our knowledge, this poses a practical and theoretical problem not previously investigated in actuarial literature. In this paper, we study the problem of post-retirement annuitization with extra labor income in the framework of stochastic control, optimal stopping, and expected utility maximization. The utility functions are of the Cobb-Douglas type. The martingale methodology and duality techniques are employed to obtain closed-form solutions for the dual and primal problems. The effect of labor income is investigated by exploiting the explicit solutions and Monte-Carlo simulation. The latter reveals that the optimal annuitization time is strongly linear with respect to the initial wealth, with or without labor income. When it comes to optimal annuitization, we find that the wage and labor rates may play opposite roles. However, their impact is mediated by the leverage ratio. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.04220&r= |
| By: | Jibang Wu; Zixuan Zhang; Zhe Feng; Zhaoran Wang; Zhuoran Yang; Michael I. Jordan; Haifeng Xu |
| Abstract: | In today's economy, it becomes important for Internet platforms to consider the sequential information design problem to align its long term interest with incentives of the gig service providers. This paper proposes a novel model of sequential information design, namely the Markov persuasion processes (MPPs), where a sender, with informational advantage, seeks to persuade a stream of myopic receivers to take actions that maximizes the sender's cumulative utilities in a finite horizon Markovian environment with varying prior and utility functions. Planning in MPPs thus faces the unique challenge in finding a signaling policy that is simultaneously persuasive to the myopic receivers and inducing the optimal long-term cumulative utilities of the sender. Nevertheless, in the population level where the model is known, it turns out that we can efficiently determine the optimal (resp. $\epsilon$-optimal) policy with finite (resp. infinite) states and outcomes, through a modified formulation of the Bellman equation. Our main technical contribution is to study the MPP under the online reinforcement learning (RL) setting, where the goal is to learn the optimal signaling policy by interacting with with the underlying MPP, without the knowledge of the sender's utility functions, prior distributions, and the Markov transition kernels. We design a provably efficient no-regret learning algorithm, the Optimism-Pessimism Principle for Persuasion Process (OP4), which features a novel combination of both optimism and pessimism principles. Our algorithm enjoys sample efficiency by achieving a sublinear $\sqrt{T}$-regret upper bound. Furthermore, both our algorithm and theory can be applied to MPPs with large space of outcomes and states via function approximation, and we showcase such a success under the linear setting. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.10678&r= |
| By: | Kurz, Heinz D. (University of Graz) |
| Abstract: | The paper reconsiders Menger’s Grundsätze (1871). It recalls, first, that the theory of marginal utility was developed by representatives of the so-called “German Use Value School”; secondly, that Menger’s criticism of the theories of value and distribution of the classical economists is based on severe misunderstandings; third, that his alternative construction is marred with difficulties spotted by Böhm-Bawerk and Wieser; fourth, that relative prices reflect inter alia the substances that “transmigrate” into commodities in the course of production. The Grundsätze are nevertheless a “great” work, because it invites to correct what is problematic in it and develop what is sound. |
| Keywords: | Classical economics; Essentialism; German Use Value School; Imputation problem; In-come distribution; Marginalism; Menger; Carl; Production; Rau; Karl Heinrich; Ricardo; David; Smith; Adam; Subjectivism; Successivism; Value |
| JEL: | A12 B12 B13 B31 D11 D24 D33 D42 D46 D51 D80 N00 O10 |
| Date: | 2022–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sraffa:0052&r= |
| By: | Daniel J. Agness; Travis Baseler; Sylvain Chassang; Pascaline Dupas; Erik Snowberg |
| Abstract: | People’s value for their own time is a key input in evaluating public policies: evaluations should account for time taken away from work or leisure as a result of policy. Using rich choice data collected from farming households in western Kenya, we show that households exhibit non-transitive preferences consistent with behavioral features such as loss aversion and self-serving bias. As a result, neither market wages nor standard valuation techniques (such as the Becker-DeGroot-Marschak—BDM—mechanism of Becker et al., 1964) correctly measure participants’ value of time. Using a structural model, we identify the mix of behavioral features driving our choice data. We find that these features distort choices when exchanging cash either for time or for goods. Our model estimates suggest that valuing the time of the self-employed at 60% of the market wage is a reasonable rule of thumb. |
| JEL: | C93 D03 D61 D91 J22 O12 Q12 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29752&r= |
| By: | Fotios Petropoulos; Daniele Apiletti; Vassilios Assimakopoulos; Mohamed Zied Babai; Devon K. Barrow; Souhaib Ben Taieb; Christoph Bergmeir; Ricardo J. Bessa; Jakub Bijak; John E. Boylan; Jethro Browell; Claudio Carnevale; Jennifer L. Castle; Pasquale Cirillo; Michael P. Clements; Clara Cordeiro; Fernando Luiz Cyrino Oliveira; Shari De Baets; Alexander Dokumentov; Joanne Ellison; Piotr Fiszeder; Philip Hans Franses; David T. Frazier; Michael Gilliland; M. Sinan G\"on\"ul; Paul Goodwin; Luigi Grossi; Yael Grushka-Cockayne; Mariangela Guidolin; Massimo Guidolin; Ulrich Gunter; Xiaojia Guo; Renato Guseo; Nigel Harvey; David F. Hendry; Ross Hollyman; Tim Januschowski; Jooyoung Jeon; Victor Richmond R. Jose; Yanfei Kang; Anne B. Koehler; Stephan Kolassa; Nikolaos Kourentzes; Sonia Leva; Feng Li; Konstantia Litsiou; Spyros Makridakis; Gael M. Martin; Andrew B. Martinez; Sheik Meeran; Theodore Modis; Konstantinos Nikolopoulos; Dilek \"Onkal; Alessia Paccagnini; Anastasios Panagiotelis; Ioannis Panapakidis; Jose M. Pav\'ia; Manuela Pedio; Diego J. Pedregal; Pierre Pinson; Patr\'icia Ramos; David E. Rapach; J. James Reade; Bahman Rostami-Tabar; Micha{\l} Rubaszek; Georgios Sermpinis; Han Lin Shang; Evangelos Spiliotis; Aris A. Syntetos; Priyanga Dilini Talagala; Thiyanga S. Talagala; Len Tashman; Dimitrios Thomakos; Thordis Thorarinsdottir; Ezio Todini; Juan Ram\'on Trapero Arenas; Xiaoqian Wang; Robert L. Winkler; Alisa Yusupova; Florian Ziel |
| Abstract: | Forecasting has always been at the forefront of decision making and planning. The uncertainty that surrounds the future is both exciting and challenging, with individuals and organisations seeking to minimise risks and maximise utilities. The large number of forecasting applications calls for a diverse set of forecasting methods to tackle real-life challenges. This article provides a non-systematic review of the theory and the practice of forecasting. We provide an overview of a wide range of theoretical, state-of-the-art models, methods, principles, and approaches to prepare, produce, organise, and evaluate forecasts. We then demonstrate how such theoretical concepts are applied in a variety of real-life contexts. We do not claim that this review is an exhaustive list of methods and applications. However, we wish that our encyclopedic presentation will offer a point of reference for the rich work that has been undertaken over the last decades, with some key insights for the future of forecasting theory and practice. Given its encyclopedic nature, the intended mode of reading is non-linear. We offer cross-references to allow the readers to navigate through the various topics. We complement the theoretical concepts and applications covered by large lists of free or open-source software implementations and publicly-available databases. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.03854&r= |