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on Utility Models and Prospect Theory |
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Issue of 2022‒08‒29
eight papers chosen by |
| By: | David M. Kaplan (Department of Economics, University of Missouri) |
| Abstract: | Instead of testing for unanimous agreement, I propose learning how broad of a consensus favors one distribution over another (of earnings, productivity, asset returns, test scores, etc.). Specifically, given a sample from each of two distributions, I propose statistical inference methods to learn about the set of utility functions for which the first distribution has higher expected utility than the second distribution. With high probability, an "inner" confidence set is contained within this true set, while an "outer" confidence set contains the true set. Such confidence sets can be formed by inverting a proposed multiple testing procedure that controls the familywise error rate. Theoretical justification comes from empirical process results, given that very large classes of utility functions are generally Donsker (subject to finite moments). The theory additionally justifies a uniform (over utility functions) confidence band of expected utility differences, as well as tests with a utility-based "restricted stochastic dominance" as either the null or alternative hypothesis. Simulated and empirical examples illustrate the methodology. |
| Keywords: | confidence set, Donsker, expected utility, familywise error rate, multiple testing, stochastic dominance |
| JEL: | C29 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:2205&r= |
| By: | Carole Bernard; Gero Junike; Thibaut Lux; Steven Vanduffel |
| Abstract: | A payoff that is the cheapest possible in reaching a given target distribution is called cost-efficient. In the presence of ambiguity the distribution of a payoff is no longer known. A payoff is called robust cost-efficient if its worst-case distribution stochastically dominates a target distribution and is the cheapest possible in doing so. We study the link between this notion of "robust cost-efficiency" and the maxmin expected utility setting of Gilboa and Schmeidler, as well as more generally with robust preferences in a possibly non-expected utility setting. We illustrate our study with examples involving uncertainty both on the drift and on the volatility of the risky asset. |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2207.02948&r= |
| By: | Kirill Borissov; Mikhail Pakhnin; Ronald Wendner |
| Abstract: | We study the role of expectations of naive agents in a general equilibrium version of the Ramsey model with quasi-hyperbolic discounting. When agents recognize others’ naivete, as strongly suggested by empirical evidence, they revise consumption paths, correctly anticipating prices in a resulting sliding equilibrium (perfect foresight). When agents are unaware of others’ naivete, as is typically assumed in the literature, they revise both consumption paths and price expectations (quasi-perfect foresight). We prove the existence of sliding equilibrium under perfect foresight for the class of isoelastic utility functions. We show that generically quasi-hyperbolic discounting matters for saving behavior: sliding equilibrium under perfect foresight is observationally equivalent to some optimal path in the standard Ramsey model if and only if utility is logarithmic. We compare sliding equilibria under different types of foresight and show that perfect foresight implies a higher saving rate, long-run capital stock, and consumption level than quasi-perfect foresight. |
| Keywords: | quasi-hyperbolic discounting, time inconsistency, naivete, sliding equilibrium, perfect foresight, observational equivalence |
| JEL: | D15 D84 D91 E21 O40 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9846&r= |
| By: | Alejandro Hirmas (University of Amsterdam); Jan Engelmann (University of Amsterdam) |
| Abstract: | Does attention have a causal impact on risky decisions? We address this question in a preregistered experiment in which participants accept or reject a series of mixed gambles while exogenously varying how information can be sampled. Specifically, in each trial participants observe the outcomes of a mixed-gamble with gains and losses presented sequentially. To isolate the causal role of attention on the decision process, we manipulate for how long each outcome is presented before showing the next one. Our results partially confirm our preregistered hypotheses that longer exposure to an outcome increases its weight on the decision. We find specific effects in the domain of losses, but not gains. A longer presentation duration of losses leads to increased sensitivity for losses, such that lotteries with higher losses are rejected more often when losses are presented for longer. To our surprise, when gains are presented for longer, the participants show increased sensitivity to both gain and loss values in their decision. Further analyses show that specifically participants with higher impulsiveness become more sensitive to outcome values when gains are presented for longer. Attentional impulsiveness is the strongest driver of this effect. Jointly, these results support the notion that attention has a causal impact on risky choice. Moreover, our results underline the moderating role of impulsiveness on the relationship between attention and choice. |
| Keywords: | Attention, Impulsiveness, Loss Aversion, Random Utility Models |
| JEL: | D91 D81 D83 D87 |
| Date: | 2022–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20220046&r= |
| By: | Zheng, Maoyong; Escalante, Cesar L. |
| Keywords: | Agricultural Finance, Risk and Uncertainty, Agribusiness |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea22:322245&r= |
| By: | Charles R. Hulten; Leonard I. Nakamura |
| Abstract: | GDP is a closely watched indicator of the current health of the economy and an important tool of economic policy. It has been called one of the great inventions of the 20th Century. It is not, however, a persuasive indicator of individual wellbeing or economic progress. There have been calls to refocus or replace GDP with a metric that better reflects the welfare dimension. In response, the U.S. agency responsible for the GDP accounts recently launched a “GDP and Beyond” program. This is by no means an easy undertaking, given the subjective and idiosyncratic nature of much of individual wellbeing. This paper joins the Beyond GDP effort by extending the standard utility maximization model of economic theory, using an expenditure function approach to include those non-GDP sources of wellbeing for which a monetary value can be established. We term our new measure expanded GDP (EGDP). A welfare-adjusted stock of wealth is also derived using the same general approach used to obtain EGDP. This stock is useful for issues involving the sustainability of wellbeing over time. One of the implications of this dichotomy is that conventional cost-based wealth may increase over a period of time while welfare-corrected wealth may show a decrease (due, for example, to strongly negative environmental externalities). |
| JEL: | C43 C51 C82 O47 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30196&r= |
| By: | Jidong Zhou (Cowles Foundation, Yale University) |
| Abstract: | How will an improved information environment affects competition and market performance when consumers face search frictions? This paper provides a unified way to model information improvement that makes the search pool more ``selective" (e.g., due to personalized recommendations), or more ``informative" (e.g., due to the availability of more detailed product information). Information improvement tends to induce consumers to search less, intensify price competition and benefit consumers, if the search friction is small, or if information improvement truncates the match utility distribution from below. More generally, however, it is also possible for information improvement to raise the market price and harm consumers. |
| Keywords: | consumer search, personalized recommendations, information improvement, price competition |
| JEL: | D43 D83 L13 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2264r&r= |
| By: | Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Antonios Staras (Cardiff University) |
| Abstract: | One reasons not just in beliefs, but also in intentions, preferences, and other attitudes. For instance, one forms preferences from preferences, or intentions from beliefs and preferences. Formal logic has proved useful for modelling reasoning in beliefs -- a process of forming beliefs from beliefs. Can logic also model reasoning in multiple attitudes? We identify principled obstacles. Logic can model reasoning about one's attitudes -- a process of discovering attitudes -- but not reasoning in attitudes -- a process of forming attitudes. Beliefs are special attitudes in that logic can model both reasoning about beliefs and reasoning in beliefs, namely as entailment between beliefs or entailment between belief contents, respectively. This makes beliefs the privileged target of logic as applied to psychology. |
| Keywords: | reasoning,logic,mental states,John Broome,rationality |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-03023015&r= |