nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒04‒25
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Two Conditions Which Induce Giffen Behavior In Any Numerical Analysis When Applied To The Wold-Juréen (1953) Utility Function By Sproule, Robert; Karras, Michael
  2. Prerationality as Avoiding Predictably Regrettable Consequences By Hammond, Peter J.
  3. Portfolio Rebalancing with Realization Utility By Min Dai; Cong Qin; Neng Wang
  4. Dynamic Optimal Hedge Ratio Design when Price and Production are stochastic with Jump By Nyassoke Titi Gaston Clément; Jules Sadefo-Kamdem; Louis Aimé Fono
  5. Konsep Dasar Ekonomi Mikro By , Icha
  6. The Biases in Applying Static Demand Models under Dynamic Demand By Takeshi Fukasawa
  7. Loss Aversion or Lack of Trust: Why Does Loss Framing Work to Encourage Preventative Health Behaviors? By Emily A. Beam; Yusufcan Masatlioglu; Tara Watson; Dean Yang
  8. Risk Aversion and Recessive Impacts of Austerity By Vaz de Castro, Afonso
  9. Consumption and Saving after Retirement By Bent Jesper Christensen; Malene Kallestrup-Lamb; John Kennan
  10. Dynamics of Subjective Risk Premia By Stefan Nagel; Zhengyang Xu

  1. By: Sproule, Robert; Karras, Michael
    Abstract: The present paper extends the existing literature on the relationship between the Wold-Juréen (1953) utility function and Giffen behavior, by extending the recent contribution by Sproule (2020) to the domain of numerical methods. In particular, this paper offers an analytical framework, by which a numerical analysis can used to induce the Wold-Juréen (1953) utility function to exhibit Giffen behavior. Our framework also demonstrates the instructional value to the Wold-Juréen (1953) utility function, especially in those microeconomics courses, in which calculus is not employed or is not emphasized.
    Keywords: Wold-Juréen (1953) utility function, Slutsky decomposition, Giffen paradox, pedagogy.
    JEL: A22 A23 D01
    Date: 2022–03–25
  2. By: Hammond, Peter J. (Dept. of Economics, University of Warwick)
    Abstract: Following previous work on consequentialist decision theory, we consider an unrestricted domain of finite decision trees, including continuation subtrees, with : (i) decision nodes where the decision maker must make a move ; (ii) chance nodes at which a “roulette lottery” with exogenously specified strictly positive probabilities is resolved ; (iii) event nodes at which a “horse lottery” is resolved. A complete family of binary conditional base preference relations over Anscombe–Aumann lottery consequences is defined to be “prerational” just in case there exists a behaviour rule that is defined throughout the tree domain which is explicable as avoiding, under all predictable circumstances, consequences that are regrettable given what is feasible. Prerationality is shown to hold if and only if all conditional base preference relations are complete and transitive, while also satisfying both the independence axiom of expected utility theory and a strict form of Anscombe and Aumann’s extension of Savage’s sure thing principle. Assuming that the base relations satisfy non-triviality and a generalized form of state independence that holds even when consequence domains are state dependent, prerationality combined with continuity on Marschak triangles is equivalent to representation by a refined subjective expected utility function that excludes zero probabilities.
    Keywords: Prerational base relations ; rational planning ; decision trees ; regrettable consequences ; Anscombe–Aumann lotteries ; preference ordering ; independence axiom ; sure-thing principle ; subjective probability ; subjective expected utility ; Bayesian rationality ; state independence JEL codes: D81
    Date: 2022
  3. By: Min Dai; Cong Qin; Neng Wang
    Abstract: We develop a model where a realization-utility investor (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013) optimally targets her liquid-illiquid wealth ratio at a constant w∗. By saving in the risk-free asset (w∗ > 0), she makes smaller bets in the illiquid asset and realizes gains/losses more frequently. By leveraging (w∗
    JEL: D03 G11 G12
    Date: 2022–03
  4. By: Nyassoke Titi Gaston Clément (Université de Douala); Jules Sadefo-Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala)
    Abstract: In this paper, we focus on the farmer's risk income, by using commodity futures, when price and output processes are correlated random represented by jump-diffusion models. We evaluate the expected utility of the farmer's wealth and we determine, at each instant of time, the optimal consumption rate and hedge position at given the time to harvest and state variables. We find a closed form optimal position of consumption and position rate in case of CARA utility investor. This result (see table 1.5) is a generalization of Ho (1984) result who consider the particular case where price and output are diffusion models.
    Keywords: Jump-diffusion process,futures,stochastic dynamic programming,Lévy measure,risk management
    Date: 2022
  5. By: , Icha
    Abstract: Ilmu ekonomi adalah bagian ilmu sosial yang mempelajari manusia bagaimana menentukan pilihan dalam menggunakan sumber daya (resource) untuk menghasilkan benda (comodity) yang diperoleh untuk memenuhi kebutuhan sehari-hari agar memperoleh guna atau manfaat (utility) yang sebesar-besarnya.
    Date: 2022–03–23
  6. By: Takeshi Fukasawa (Graduate School of Economics, The University of Tokyo and Junior Research Fellow, Research Institute for Economics and Business Administration, Kobe University, JAPAN)
    Abstract: This article investigates why applying static demand models yields biased results under dynamic demand. Recent empirical studies analyzing markets with dynamic demand have found that applying static demand models yields biased estimates of utility parameter estimates and price elasticities of demand. By developing an analytical framework, this study shows how the biases arise and when they are large. There are three sources of biases: inconsistent utility parameter estimates, disregard of state variables (affecting short-run price elasticity), and changing expectations of consumers (affecting long-run price elasticity). The study shows that we can obtain consistent utility parameter estimates by introducing time-group fixed effect terms under some conditions. Short-run own elasticity is overestimated under static models given consistent utility parameter estimates and nonexistence of unobserved consumer heterogeneity. Especially when the focus is on the large market share products, the second and the third sources of biases induce large biases in price elasticities.
    Keywords: Dynamic demand; Static demand model; Estimation bias; Price elasticity of demand; Dynamic discrete choice
    Date: 2022–04
  7. By: Emily A. Beam; Yusufcan Masatlioglu; Tara Watson; Dean Yang
    Abstract: We implemented a field experiment designed to increase participants’ willingness to visit a health clinic. We find differential responses to a $50 incentive framed as a loss versus framed as a gain. We find little support for the notion that loss aversion is responsible for the effectiveness of loss framing. Instead, it appears that loss framing promotes take-up by raising the perceived probability that the incentive will be provided as promised. The results suggest trust is an alternative pathway through which loss framing may affect behavior, and trust may be an important way to promote desirable health behaviors.
    JEL: C93 D03 I12
    Date: 2022–03
  8. By: Vaz de Castro, Afonso
    Abstract: This paper aims to contribute for the vast literature on the impact of country-specific characteristics on fiscal multipliers. We argue that countries have relevant differences in risk attitudes, and that those differences are economically significant in determining output responses to fiscal consolidation programs. We start with an empirical analysis, estimating the coefficient of relative risk aversion for nine European economies, finding relevant heterogeneity across countries. Using the coefficients found, we calibrate an incomplete markets overlapping generations model and study the impacts of an unanticipated fiscal consolidation shock. We find a positive relationship between fiscal multipliers and risk aversion when there is a spending-based consolidation, showing that recessive impacts from austerity are stronger the larger the degree of risk aversion. The underlying mechanism depends on the effect of risk aversion on precautionary savings behavior and so on the share of constrained agents. Larger risk aversion induces more precautionary savings, thus shrinking the share of constrained agents. Credit-constrained agents have a less responsive labor supply with respect to spending-based fiscal consolidation shocks.
    Keywords: Fiscal Multipliers, Fiscal Consolidation, Relative Risk Aversion
    JEL: E21 E62 H31 H63 I31
    Date: 2022–01–14
  9. By: Bent Jesper Christensen; Malene Kallestrup-Lamb; John Kennan
    Abstract: The paper analyzes consumption decisions of retired workers, using Danish register data. A major puzzle, which motivates much of the analysis below, is that wealth actually increases for a large fraction of the people in our data. One would expect that wealth accumulated before retirement would be used to augment consumption in later life, with the implication that wealth should decline over time. The risk of large out-of-pocket medical expenditures is negligible in Denmark, so although explanations associated with such expenditures might explain similar patterns in U.S. data, these explanations are not plausible for Denmark (and therefore also questionable for the U.S.). Our analysis instead attempts to explain wealth paths using a model that emphasizes fluctuations in the marginal utility of consumption. The results show that a latent state variable extension of the standard life-cycle consumption model is quite successful in explaining the curious observed wealth patterns after retirement for singles.
    JEL: E21 J26
    Date: 2022–03
  10. By: Stefan Nagel; Zhengyang Xu
    Abstract: We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-of-sample forecasts of excess returns, which suggests that investors’ learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs.
    JEL: G12 G41
    Date: 2022–02

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