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on Utility Models and Prospect Theory |
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Issue of 2022‒08‒08
seventeen papers chosen by |
| By: | Takao Asano (Okayama University); Hiroyuki Kojima (Teikyo University); Kaname Miyagishima (Aoyama Gakuin University) |
| Abstract: | By assuming that a state space is finite, we provide an easy-to-understand axiomatization of neo-additive Choquet expected utility theory (CEU) following Chateauneuf et al. (2007). Our axiomatization based on Möbius inversions sheds new light on their usefulness for our understanding of the behaviors of decision makers and enables us to provide new interpretations for neo-additive CEU from uncertainty aversion (uncertainty lovingness) and certainty equivalent, respectively. Furthermore, our approach enables us to understand the relationship between existing contributions by Chateauneuf et al. (2007), Kajii et al. (2009), and Asano and Kojima (2022) in a clearer and more unified way. |
| Keywords: | Neo-additive Choquet Expected Utility, Möbius Inversion |
| JEL: | C71 D81 D90 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1080&r= |
| By: | David Criens; Lars Niemann |
| Abstract: | In this paper we study a robust utility maximization problem in continuous time under model uncertainty. The model uncertainty is governed by a continuous semimartingale with uncertain local characteristics. Here, the differential characteristics are prescribed by a set-valued function that depends on time and path. We show that the robust utility maximization problem is in duality with a conjugate problem, and study the existence of optimal portfolios for logarithmic, exponential and power utilities. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.14015&r= |
| By: | Carole Bernard; Stephan Sturm |
| Abstract: | This paper studies the topic of cost-efficiency in incomplete markets. A portfolio payoff is called cost-efficient if it achieves a given probability distribution at some given investment horizon with a minimum initial budget. Extensive literature exists for the case of a complete financial market. We show how the problem can be extended to incomplete markets and that the main results from the theory of complete markets still hold in adapted form. In particular, we find that in incomplete markets, the optimal portfolio choice for law-invariant non-decreasing preferences must be "perfectly" cost-efficient. This notion of perfect cost-efficiency is shown to be equivalent to the fact that the payoff can be rationalized, i.e., it is the solution to an expected utility problem. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.12511&r= |
| By: | Haris Aziz; Sujit Gujar; Manisha Padala; Mashbat Suzuki; Jeremy Vollen |
| Abstract: | We formalize a framework for coordinating the funding of projects and sharing the costs among agents with quasi-linear utility functions and individual budgets. Our model contains the classical discrete participatory budgeting model as a special case, while capturing other well-motivated problems. We propose several important axioms and objectives and study how well they can be simultaneously satisfied. One of our main results is that whereas welfare maximization admits an FPTAS, welfare maximization subject to a well-motivated and very weak participation requirement leads to a strong inapproximability result. We show that this result is bypassed if we consider some natural restricted valuations or when we take an average-case heuristic approach. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.05966&r= |
| By: | Alexei Parakhonyak; Anton Sobolev |
| Abstract: | We consider an information design problem when the sender faces ambiguity regarding the probability distribution over the states of the world, the utility function and the prior of the receiver. The solution concept is minimax loss (regret), that is, the sender minimizes the distance from the full information benchmark in the worst-case scenario. We show that in the binary states and binary actions setting the optimal strategy involves a mechanism with a continuum of messages, which admits a representation as a randomization over mechanisms consisting of two messages. A small level of uncertainty regarding the re- ceiver’s prior makes the sender more truthful than in the full information benchmark, but as uncertainty increases at some point the sender starts to lie more. If the sender either knows the probability distribution over the states of the world, or knows that the receiver knows it, then the maximal loss is bounded from above by 1/e. This result generalizes to an infinite state model, provided that the set of admissible mechanisms is limited to cut-off strategies. |
| Keywords: | Persuasion, Robustness, Multiple priors, Minimax regret |
| JEL: | D81 D82 D83 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_359&r= |
| By: | Coralie KERSULEC; Luc DOYEN |
| Abstract: | The increasing consumption of seafood products raises concerns over the sustainability of marine ecosystems. We examine the role of consumer preferences on seafood demand and consequently on the sustainability of fisheries. Our analysis relies on a bio-economic model combining a demand derived from a CES utility depending on different fish species, a mixed fishery supply based on the Schaefer production function, a market equilibrium and a multispecies resource-based dynamics. Using both a steady-state approach and bio-economic viability goals, we identify analytical conditions on consumer preferences making it possible to balance biodiversity conservation with viable profits. We derive policy recommendations in terms of eco-labels for the sustainability of fisheries and the underlying seafood system. We exemplify the analytical results with the coastal fishery in French Guiana. |
| Keywords: | Biodiversity, Multi-species fishery, Sustainability, Ecolabel, CES utility function, Consumer preferences, Food systems, Viability goals; Bioeconomics. |
| JEL: | Q21 Q22 Q57 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:grt:bdxewp:2022-10&r= |
| By: | Marek Weretka (University of Wisconsin-Madison; Group for Research in Applied Economics (GRAPE)); Daniel Quint (University of Wisconsin-Madison) |
| Abstract: | We present a learning-based selection argument for Linear Bayesian Nash equilibrium in a Walrasian auction. Endowments vary stochastically; traders model residual supply as linear, estimate its slope from past trade data, and periodically update these estimates. With quadratic preferences, this learning process converges to the unique LBN. In an example with non-quadratic preferences, it converges to a steady state close to a particular equilibrium of the corresponding deterministic setting; strategies played are not an equilibrium, but utility sacrificed is negligible. Anonymity and statistical learning therefore support use of LBN under quadratic utility, and motivate a related concept under non-quadratic utility. |
| Keywords: | Walrasian auction, anonymous thin markets, price impacts |
| JEL: | D43 D52 L13 L14 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:64&r= |
| By: | Hjertstrand, Per (Research Institute of Industrial Economics (IFN)) |
| Abstract: | The mixed-demand model allows for very flexible specification of what should be considered endogenous and exogenous in demand system estimation. This paper introduces a revealed preference framework to analyze the mixed-demand model. The proposed methods can be used to test whether observed data (with measurement errors) are consistent with the mixed-demand model and calculate goodness-of-fit measures. The framework is purely non-parametric in the sense that it does not require any functional form assumptions on the direct or indirect utility functions. The framework is applied to demand data for food and provides the first nonparametric empirical analysis of the mixed-demand model. |
| Keywords: | Demand systems; Measurement errors; Mixed-demand; Non-parametric; Revealed preference |
| JEL: | D11 D12 |
| Date: | 2022–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1430&r= |
| By: | Yurong Chen; Xiaotie Deng; Yuhao Li |
| Abstract: | To take advantage of strategy commitment, a useful tactic of playing games, a leader must learn enough information about the follower's payoff function. However, this leaves the follower a chance to provide fake information and influence the final game outcome. Through a carefully contrived payoff function misreported to the learning leader, the follower may induce an outcome that benefits him more, compared to the ones when he truthfully behaves. We study the follower's optimal manipulation via such strategic behaviors in extensive-form games. Followers' different attitudes are taken into account. An optimistic follower maximizes his true utility among all game outcomes that can be induced by some payoff function. A pessimistic follower only considers misreporting payoff functions that induce a unique game outcome. For all the settings considered in this paper, we characterize all the possible game outcomes that can be induced successfully. We show that it is polynomial-time tractable for the follower to find the optimal way of misreporting his private payoff information. Our work completely resolves this follower's optimal manipulation problem on an extensive-form game tree. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.13119&r= |
| By: | Carlo Lazzaro; Cecile van Steen; Florent Aptel (CHU Grenoble); Cedric Schweitzer (BPH - Bordeaux population health - UB - Université de Bordeaux - Institut de Santé Publique, d'Épidémiologie et de Développement (ISPED) - INSERM - Institut National de la Santé et de la Recherche Médicale, CHU Bordeaux [Bordeaux]); Luigi Angelillo |
| Abstract: | PURPOSE: To investigate the cost utility of STN1013001, a latanoprost cationic emulsion, versus Latanoprost in patients with open-angle glaucoma or ocular hypertension (OAG/OHT) and concomitant ocular surface disease (OSD) in France. METHODS: An early Markov model, including 7 health states and a 1-year cycle length, was developed to estimate the cost utility of STN1013001 versus Latanoprost from the French health system perspective over a 5-year time horizon. The model was populated with pooled data (treatment adherence, quality of life, disease progression, and resource utilization) collected, via a questionnaire, from a convenience sample of 5 French glaucoma specialists. Remaining data were retrieved from published sources. Half-cycle correction and 2.5% real social discount rate were applied to costs (in €2020), life years saved (LYS), and quality-adjusted life years (QALYs). The incremental cost-utility ratio (ICUR) was contrasted against the informal willingness-to-pay (WTP) range for incremental LYS or QALY gained (€30,000-€50,000) suggested for France. One-way and probabilistic sensitivity analyses tested the robustness of the baseline ICUR. RESULTS: Over a 5-year time horizon, STN1013001 resulted in an incremental 0.35 QALYs gained at an incremental cost of €7.39 compared to Latanoprost, resulting in an ICUR of €21.26. This is well below the lower limit of the unofficial WTP range proposed for France. Sensitivity analyses confirmed the robustness of the baseline results. CONCLUSION: Once on the market, STN1013001 will provide the French health system with a cost-effective treatment versus Latanoprost for OAG/OHT + OSD patients. These results should be confirmed by future economic evaluations carried out alongside empirical trials. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03696350&r= |
| By: | Vincent Leon; S. Rasoul Etesami; Rakesh Nagi |
| Abstract: | We consider the diffusion of innovation in social networks using a game-theoretic approach. Each individual plays a coordination game with its neighbors and decides what alternative product to adopt to maximize its payoff. As products are used in conjunction with others and through repeated interactions, individuals are more interested in their long-term benefits and tend to show trustworthiness to others to maximize their long-term payoffs. To capture such trustworthy behavior, we deviate from the expected utility theory and use a new notion of rationality based on limited-trust equilibrium (LTE). By incorporating such notion into the diffusion model, we analyze the convergence of emerging dynamics to their equilibrium points using a mean-field approximation. We study the equilibrium state and the convergence rate of the diffusion process using the absorption probability and the expected absorption time of a reduced-size absorbing Markov chain. We also show that the LTE diffusion model under the best-response strategy can be converted to the well-known linear threshold model. Simulations show that when agents behave trustworthily, their long-term payoffs will increase significantly compared to the case when they are solely self-interested. Moreover, the Markov chain analysis provides a good estimation of the convergence property over random networks. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2206.06318&r= |
| By: | Laurence Jacquet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Etienne Lehmann |
| Abstract: | We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin. |
| Keywords: | Optimal taxation,mechanism design,multidimensional screening problems,allocation perturbation |
| Date: | 2021–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03681456&r= |
| By: | Pugatch, Todd (Oregon State University); Schroeder, Elizabeth (Oregon State University); Wilson, Nicholas (Robinhood) |
| 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 present-biased 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: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15367&r= |
| By: | Mark Glick (University of Utah) |
| Abstract: | Two recent papers by prominent antitrust scholars argue that a revived antitrust movement can help reverse the dramatic rise in economic inequality and the erosion of political democracy in the United States. Both papers rely on the legislative history of the key antitrust statutes to support their case. Not surprisingly, their recommendations have been met with alarm in some quarters and with skepticism in others. Such proposals by antitrust reformers are often contrasted with the Consumer Welfare Standard that pervades antitrust policy today. The Consumer Welfare Standard suffers from several defects: (1) It employs a narrow, unworkable measure of welfare; (2) It excludes important sources of welfare based on the assumption that antitrust seeks only to maximize wealth; (3) It assumes a constant and equal individual marginal utility of money; and (4) It is often combined with extraneous ideological goals. Even with these defects, however, if applied consistent with its theoretical underpinnings, the consideration of the transfer of labor rents resulting from a merger or dominant firm conduct is supported by the Consumer Welfare Standard. Moreover, even when only consumers (and not producers) are deemed relevant, the welfare of labor still should consistently be considered part of consumer welfare. In contrast, fostering political democracy—a prominent traditional antitrust goal that was jettisoned by the Chicago School—falls outside the Consumer Welfare Standard in any of its constructs. To undergird such important broader goals requires that the Consumer Welfare Standard be replaced with the General Welfare Standard. The General Welfare Standard consists of modern welfare economics modified to accommodate objective analyses of human welfare and purged of inconsistencies. |
| Keywords: | New Brandeis School, Antitrust economics, Antitrust law, Neoliberal Economic Theory, Chicago School Economics, History of Antitrust law; market concentration; corporation size. |
| JEL: | K21 L40 N12 |
| Date: | 2022–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp181&r= |
| By: | Niels Boissonnet (Universität Bielefeld = Bielefeld University); Alexis Ghersengorin (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | A decision exhibits reactance if it is not directly welfare maximizing but represents a way to protest against a threat to the decision maker's freedom of choice. We provide a first axiomatic revealed preference characterization of this phenomenon, which yields necessary and sufficient conditions for deviations from rational choice to be ascribed to reactance. These conditions are shown to characterize a representation of preferences underlying choices consistent with reactance. We next look at two applications that have been (informally) associated with reactance in the psychology literature and demonstrate that reactance can imply the emergence of conspiracy theories and a backlash of integration policy targeted towards immigrants. Finally, we derive the resulting preference ordering over opportunity sets for agents whose final choices are consistent with reactance. |
| Keywords: | revealed preferences,freedom,reactance |
| Date: | 2022–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03672722&r= |
| By: | Finger, Robert; Wüpper, David; McCallum, Chloe |
| Abstract: | We test and quantify the (in)stability of farmer risk preferences, accounting for both the instability across elicitation methods and the instability over time. We used repeated measurements (N=1530) with Swiss fruit and grapevine producers over 3 years, where different risk preference elicitation methods (domain-specific self-assessment and incentivized lotteries) were used. We find that farmers’ risk preferences change considerably when measured using different methods. For example, self-reported risk preference and findings from a Holt and Laury lottery correlate only weakly (correlation coefficients range from 0.06 to 0.23). Moreover, we find that risk preferences vary considerable over time too, i.e. applying the same elicitation method to the same farmer in a different point in time results in different risk preference estimates. Our results show self-reported risk preferences are moderately correlated (correlation coefficients range from 0.42 to 0.55) from one year to another. Finally, we find experiencing climate and pest related crop damages is associated with farmers becoming more risk loving. |
| Keywords: | Research Methods/ Statistical Methods, Risk and Uncertainty |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc22:321196&r= |
| By: | Paul Hindsley; O. Ashton Morgan; John C. Whitehead |
| Abstract: | This paper investigates recreational divers’ preferences for artificial reef diving and willingness to pay (WTP) for large ship, artificial reef site attributes in the Florida Keys. We investigate diver demand for existing decommissioned ships that have been sunk off the Florida Keys as well as demand for four new vessels that are available for disposal from the U.S. Department of Transportation Maritime Administration inventory. Using survey data from divers, we compare revealed preference (RP) site choices, stated preference (SP) choices from a discrete choice experiment, and joint RP/SP choices. Our analysis also incorporates stated attribute nonattendance (ANA) at the choice-task level. Our results indicate that the joint RP/SP models with stated ANA are preferred, leading to decreases in marginal WTP as well as decreases in the variability of marginal WTP estimates in the 95% confidence intervals. Results provide a framework for directing more efficient future decision making regarding sinkings at locations that will enhance welfare for divers. Key Words: discrete choice experiment; artificial reefs; diving demand; willingness to pay |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:22-05&r= |