nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒07‒11
sixteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Teori Nilai Guna (Utility) By Waasi, Nur
  2. Resume Teori Nilai Guna (Utility) By Najjar, Nadilah Anisah
  3. Agreement and Statistical Efficiency in Bayesian Perception Models By Yash Deshpande; Elchanan Mossel; Youngtak Sohn
  4. Income–well-being gradient in sickness and health By Kanninen, Ohto; Böckerman, Petri; Suoniemi, Ilpo
  5. Predicting Choice from Information Costs By Elliot Lipnowski; Doron Ravid
  6. Kantian optimization with quasi-hyperbolic discounting By Borissov, Kirill; Pakhnin, Mikhail; Wendner, Ronald
  7. Asymmetric Equilibria in Symmetric Multiplayer Prisoners Dilemma Supergames By Davidson Cheng
  8. Guilt Aversion: Eve versus Adam By Giovanni Di Bartolomeo; Martin Dufwenberg; Stefano Papa; Laura Razzolini
  9. Behavioral changes in different designs of search experiments By Yuta Kittaka; Ryo Mikami; Natsumi Shimada
  10. The effect of time-varying fundamentals in Learning-to-Forecast Experiments By Alfarano, Simone; Camacho-Cuena, Eva; Colasante, Annarita; Ruiz-Buforn, Alba
  11. On the Obsolescence of Long-Run Rationality By David Allen Axelrod
  12. Study More Tomorrow By Pugatch, Todd; Schroeder, Elizabeth; Wilson, Nicholas
  13. A Graph-based Similarity Function for CBDT: Acquiring and Using New Information By Federico Contiggiani; Fernando Delbianco; Fernando Tohmé
  14. Price Theory for Incomplete Markets By Emmanuel Farhi; Alan Olivi; Iván Werning
  15. Boom-bust cycles and asset market participation waves: Momentum, value, risk and herding By Dieci, Roberto; Schmitt, Noemi; Westerhoff, Frank H.
  16. Multi-asset noisy rational expectations equilibrium with contingent claims By Chabakauri, Georgy; Yuan, Kathy; Zachariadis, Konstantinos E.

  1. By: Waasi, Nur
    Abstract: Teori nilai guna (utility) berdasarkan pemaparan Sukirno (1994) adalah total kepuasan yang diperoleh ketika seseorang menggunakan suatu barang. Dalam bukunya, Sukirno (1994) menjelaskan bahwa terdapat dua macam pendekatan teori nilai guna yaitu, pendekatan nilai guna kardinal serta pendekatan nilai guna ordinal.
    Date: 2022–04–17
  2. By: Najjar, Nadilah Anisah
    Abstract: Menurut Sukirno (1994) teori nilai guna (utility) adalah total kepuasan yang diperoleh ketika seseorang menggunakan suatu barang. Terdapat dua macam pendekatan teori nilai guna (utility), yaitu: pendekatan nilai guna kardinal dan pendekatan nilai guna ordinal. Dalam pendekatan nilai guna kardinal dianggap manfaat atau kenikmatan yang diperoleh seorang konsumen dapat dinyatakan secara kuantitatif. Sedangkan pendekatan nilai guna ordinal, manfaat atau kenikmatan yang diperoleh masyarakat dari mengkonsumsikan barang-barang tidak dapat dinilai secara kuantitatif.
    Date: 2022–04–17
  3. By: Yash Deshpande; Elchanan Mossel; Youngtak Sohn
    Abstract: Bayesian models of group learning are studied in Economics since the 1970s and more recently in computational linguistics. The models from Economics postulate that agents maximize utility in their communication and actions. The Economics models do not explain the "probability matching" phenomena that are observed in many experimental studies. To address these observations, Bayesian models that do not formally fit into the economic utility maximization framework were introduced. In these models individuals sample from their posteriors in communication. In this work, we study the asymptotic behavior of such models on connected networks with repeated communication. Perhaps surprisingly, despite the fact that individual agents are not utility maximizers in the classical sense, we establish that the individuals ultimately agree and furthermore show that the limiting posterior is Bayes optimal.
    Date: 2022–05
  4. By: Kanninen, Ohto; Böckerman, Petri; Suoniemi, Ilpo
    Abstract: We propose a method of studying the value of insurance. For this purpose, we analyze well-being of the same individuals, comparing sick and healthy years in German panel survey data on life satisfaction. To impose structure on the income–wellbeing gradient, we fit a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy state, by allowing for a “fixed cost of sickness”. We find that marginal utility of income is higher in the sick state. We use our estimates to gauge the value of sickness insurance for Baily-Chetty type optimal policy calculations. We also show that the income–wellbeing gradient has steepened over time in Germany and we use the fitted model to characterize this change.
    Keywords: life satisfaction state dependence risk aversion social insurance optimal benefits sickness absence
    JEL: C13 H55 I13
    Date: 2022–06–02
  5. By: Elliot Lipnowski; Doron Ravid
    Abstract: An agent acquires a costly flexible signal before making a decision. We explore the degree to which knowledge of the agent's information costs helps predict her behavior. We establish an impossibility result: learning costs alone generate no testable restrictions on choice without also imposing constraints on actions' state-dependent utilities. By contrast, for most utility functions, knowing both the utility and information costs enables a unique behavioral prediction. Finally, we show that for smooth costs, most choices from a menu uniquely pin down the agent's decisions in all submenus.
    Date: 2022–05
  6. By: Borissov, Kirill; Pakhnin, Mikhail; Wendner, Ronald
    Abstract: We consider a neoclassical growth model with quasi-hyperbolic discounting under Kantian optimization: each temporal self acts in a way that they would like every future self to act. We introduce the notion of a Kantian policy as an outcome of Kantian optimization in a given class of policies. We derive and characterize a Kantian policy in the class of policies with a constant saving rate for an economy with log-utility and Cobb--Douglas production technology and an economy with isoelastic utility and linear production technology. In all cases, the Kantian saving rate is higher than the saving rate of sophisticated agents, and a Kantian path Pareto dominates a sophisticated path.
    Keywords: Quasi-hyperbolic discounting; Time inconsistency; Kantian equilibrium; Sophisticated agents; Saving rate; Welfare
    JEL: C70 D14 D91 E21 O40
    Date: 2022–06–06
  7. By: Davidson Cheng
    Abstract: We propose a finite automaton-style solution concept for supergames. In our model, we define an equilibrium to be a cycle of state switches and a supergame to be an infinite walk on states of a finite stage game. We show that if the stage game is locally non-cooperative, and the utility function is monotonously decreasing as the number of defective agents increases, the symmetric multiagent prisoners' dilemma supergame must contain one symmetric equilibrium and can contain asymmetric equilibria.
    Date: 2022–05
  8. By: Giovanni Di Bartolomeo; Martin Dufwenberg; Stefano Papa; Laura Razzolini
    Abstract: Our study contributes to a large literature in experimental economics that explores gender differences in how people are motivated. We focus on guilt aversion (GA), a surprisingly rather unexplored issue. Our experiment supports the idea that men are more GA than women. Our results also support different rationales to explain observed similar behaviors, like promise keeping. We provide a potential intuition for our findings, which is based on the pregnancy-related biological asymmetry between genders.
    Keywords: gender; guilt aversion; promises; evolutionary psychology
    JEL: A13 C91 D03 D64
    Date: 2022–06
  9. By: Yuta Kittaka; Ryo Mikami; Natsumi Shimada
    Abstract: While search experiments are available in several designs, growing experimental evidence suggests that individual search behavior depends on design details. We conduct an experiment providing the first categorization and comparison of several search experiment designs widely accepted in search studies. These designs can be categorized as passive, quasi-active, and active, according to the degree of flexibility in decision-making regarding the search. Despite the experiment being based on an identical model, we found significant differences at the aggregate- and individual-level in the results across designs. The average number of searches was the highest and closest to the theoretical value in the active design. Compared with the active design, subjects searched significantly less in the quasiactive and passive designs. The results indicate that the widely accepted design, wherein subjects make decisions based on a given offer rather than choosing among potential alternatives themselves, may have unexpected effects on subjects’ behavior. Furthermore, subjects’ risk aversion has a significant effect only in the passive design, suggesting that out-of-model factors specific to that design may influence behavior through risk preferences. Other methodological implications for search experiments are also provided.
    Date: 2021–11
  10. By: Alfarano, Simone; Camacho-Cuena, Eva; Colasante, Annarita; Ruiz-Buforn, Alba
    Abstract: Inspired by macroeconomic scenarios, we aim to experimentally investigate the evolution of short- and long-run expectations under different specifications of the fundamentals. We collect individual predictions for the future prices in a series of Learning to Forecast Experiments with a time-varying fundamental value. In particular, we observe how expectations evolve in markets where the fundamental value follows either a V-shaped or an inverse V-shaped pattern. These conditions are compared with markets characterized by a constant and a slightly linear increasing fundamental value. We assess whether minor but systematic variations in the fundamentals affect individual short- and long-run expectations by considering positive and negative feedback-expectation systems. Even though such variations in the fundamentals turn out not to strongly affect the way subjects form their expectations in positive feedback markets, we observe significant changes in negative feedback markets.
    Keywords: Long-run expectations; Coordination; Convergence; Heterogeneous expectations; Expectations feedback; Experimental economics
    JEL: C91 D03 G12
    Date: 2022–04
  11. By: David Allen Axelrod (Montclair State University, Montclair, NJ, USA)
    Abstract: The rapid pace of technological change challenges assumptions concerning the economic “long-run†. Consequentially, it disrupts the optimal psychological balance of emotion, reason, intuition and faith in our decision making. This is described in terms of the microeconomic conception of “runs†, decision frames defined by the scope of what is variable in the production process and endogenously determined. The four types are: market period, short, long and very long. These relate to time horizons that have parallels in terms of mindsets and the production of experiences. We show how a decrease in time between tech advances causes a sublimation from the short-run to the very long-run, thereby making long-run analysis obsolete. Further, these changes are associated with increased uncertainty about the future that is associated with increasing myopia. This can trigger a substitution out of reason into either emotion-based and/or intuition-based choice, as well as a greater demand on faith to maintain behavior. The implication is an exaggerated bifurcation in society between people driven by emotions to mediate the moment, and those reliant on vision and faith in technological progress to make their plans seem reasonable.
    Keywords: Long-Run, Uncertainty, Obsolescence, Microeconomics, Faith, Myopia
    Date: 2021–12
  12. By: Pugatch, Todd; Schroeder, Elizabeth; Wilson, Nicholas
    Abstract: We design a commitment contract for college students, "Study More Tomorrow," and conduct a randomized control trial testing a model of its demand. The contract commits students to attend peer tutoring if their midterm grade falls below a prespecified threshold. The contract carries a financial penalty for noncompliance, in contrast to other commitment devices for studying tested in the literature. We find demand for the contract, with take-up of 10% among students randomly assigned a contract offer. Contract demand is not higher among students randomly assigned to a lower contract price, plausibly because a lower contract price also means a lower commitment benefit of the contract. Students with the highest perceived utility for peer tutoring have greater demand for commitment, consistent with our model. Contrary to the model's predictions, we fail to find evidence of increased demand among presentbiased students or among those with higher self-reported tendency to procrastinate. Our results show that college students are willing to pay for study commitment devices. The sources of this demand do not align fully with behavioral theories, however.
    Keywords: economics of education,higher education,commitment contracts,randomized control trials
    JEL: D91 I21 I23
    Date: 2022
  13. By: Federico Contiggiani (Universidad Nacional de Río Negro); Fernando Delbianco (Universidad Nacional del Sur/CONICET); Fernando Tohmé (Universidad Nacional del Sur/CONICET)
    Abstract: One of the consequences of persistent technological change is that it force individuals to make decisions under extreme uncertainty. This means that traditional decision-making frameworks cannot be applied. To address this issue we introduce a variant of Case-Based Decision Theory, in which the solution to a problem obtains in terms of the distance to previous problems. We formalize this by defining a space based on an orthogonal basis of features of problems. We show how this framework evolves upon the acquisition of new information, namely features or values of them arising in new problems. We discuss how this can be useful to evaluate decisions based on not yet existing data.
    Keywords: : Microeconomic Behavior, Decision-Making under Risk and Uncertainty, Case Based Decision Theory
    JEL: D01 D81
    Date: 2022–05
  14. By: Emmanuel Farhi; Alan Olivi; Iván Werning
    Abstract: We provide a price theory for incomplete markets that extends the traditional Walrasian analysis. We derive formulas expressing the consumption response to current and future changes in interest rates and income. Our analysis provides a natural decomposition of these responses into substitution and income effects with structural interpretation, emphasizing statistics such as the marginal propensity to save and local measures of prudence in utility. We handle general uncertainty in a compact and intuitive manner by adjusting probability distributions: a risk-adjusted probability, commonly used in finance, and a novel prudence-adjusted probability, specifically useful for incomplete markets. Our formulas reveal various cross-restrictions implied by the theory on consumer behavior. Numerical explorations show that the new statistics we identify matter significantly to understand aggregate demand in incomplete markets, beyond the impact of heterogeneous marginal propensities to consume or binding borrowing constraints.
    JEL: D1 D52
    Date: 2022–05
  15. By: Dieci, Roberto; Schmitt, Noemi; Westerhoff, Frank H.
    Abstract: We develop an asset market participation model in which investors base their market entry decisions on the momentum, value and risk of the market. Despite our behavioral framework, the model's fundamental steady state is characterized by standard present-value relations between expected future payouts and the model-implied risk-adjusted return. We derive conditions under which endogenous asset market participation waves and co-evolving boom-bust cycles emerge. Moreover, we show that the asset market may display spontaneous, sharp and permanent downturns if investors react sensitively to risk, an outcome that goes hand in hand with low asset market participation rates and excess volatility.
    Keywords: boom-bust cycles,asset market participation waves,momentum, value and risk,herding behavior,feedback loops
    JEL: D84 G12 G41
    Date: 2022
  16. By: Chabakauri, Georgy; Yuan, Kathy; Zachariadis, Konstantinos E.
    Abstract: We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow-Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.
    Keywords: asymmetric information; learning from prices; multi-asset economy; Paul Woolley Centre; OUP deal
    JEL: D82 G12 G14
    Date: 2021–11–26

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