nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒09‒05
sixteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Persuading Risk-Conscious Agents: A Geometric Approach By Jerry Anunrojwong; Krishnamurthy Iyer; David Lingenbrink
  2. Trading under the Proof-of-Stake Protocol -- a Continuous-Time Control Approach By Wenpin Tang; David D. Yao
  3. A Scalable Bayesian Persuasion Framework for Epidemic Containment on Heterogeneous Networks By Shraddha Pathak; Ankur A. Kulkarni
  4. On Balanced Games with Infinitely Many Players: Revisiting Schmeidler's Result By David Bartl; Mikl\'os Pint\'er
  5. Incentive Fees with a Moving Benchmark and Portfolio Selection under Loss Aversion By Constantin Mellios; Anh Ngoc Lai
  6. Loss aversion in strategy-proof school-choice mechanisms By Vincent Meisner; Jonas von Wangenheim
  7. Meta-Analysis of Inequality Aversion Estimates By Salvatore Nunnari; Massimiliano Pozzi
  8. Screening with Multitasking By Michael Dinerstein; Isaac M. Opper
  9. On the Distributional Robustness of Finite Rational Inattention Models By Emerson Melo
  10. Choice That’s Rational By Chatterjee, Sidharta
  11. A general framework to quantify the event importance in multi-event contests By Goller, Daniel; Heiniger, Sandro
  12. Gacha Game: When Prospect Theory Meets Optimal Pricing By Tan Gan
  13. The effect of sentiment on institutional investors: A gender analysis By Gehde-Trapp, Monika; Klingler, Linda
  14. What and why? Exploring rational myths of industrial symbioses in French case studies By Nicolas Bijon; Juliette Cerceau; Magali Dechesne; Guillaume Junqua; Tom Wassenaar
  15. A framework for evaluating the impact of Strategic Alignment and Projects Portfolios Management on the ICT investment process: Case of public organizations By Salah Jadda; Nawfal Acha; Hafid Barka
  16. Local Information and Firm Expectations about Aggregates By Jonas Dovern; Lena Sophia Müller; Klaus Wohlrabe

  1. By: Jerry Anunrojwong; Krishnamurthy Iyer; David Lingenbrink
    Abstract: We consider a persuasion problem between a sender and a receiver whose utility may be nonlinear in her belief; we call such receivers risk-conscious. Such utility models arise when the receiver exhibits systematic biases away from expected-utility-maximization, such as uncertainty aversion (e.g., from sensitivity to the variance of the waiting time for a service). Due to this nonlinearity, the standard approach to finding the optimal persuasion mechanism using revelation principle fails. To overcome this difficulty, we use the underlying geometry of the problem to develop a convex optimization framework to find the optimal persuasion mechanism. We define the notion of full persuasion and use our framework to characterize conditions under which full persuasion can be achieved. We use our approach to study binary persuasion, where the receiver has two actions and the sender strictly prefers one of them at every state. Under a convexity assumption, we show that the binary persuasion problem reduces to a linear program, and establish a canonical set of signals where each signal either reveals the state or induces in the receiver uncertainty between two states. Finally, we discuss the broader applicability of our methods to more general contexts, and illustrate our methodology by studying information sharing of waiting times in service systems.
    Date: 2022–08
  2. By: Wenpin Tang; David D. Yao
    Abstract: We develop a continuous-time control approach to optimal trading in a Proof-of-Stake (PoS) blockchain, formulated as a consumption-investment problem that aims to strike the optimal balance between a participant's (or agent's) utility from holding/trading stakes and utility from consumption. We present solutions via dynamic programming and the Hamilton-Jacobi-Bellman (HJB) equations. When the utility functions are linear or convex, we derive close-form solutions and show that the bang-bang strategy is optimal (i.e., always buy or sell at full capacity). Furthermore, we bring out the explicit connection between the rate of return in trading/holding stakes and the participant's risk-adjusted valuation of the stakes. In particular, we show when a participant is risk-neutral or risk-seeking, corresponding to the risk-adjusted valuation being a martingale or a sub-martingale, the optimal strategy must be to either buy all the time, sell all the time, or first buy then sell, and with both buying and selling executed at full capacity. We also propose a risk-control version of the consumption-investment problem; and for a special case, the ''stake-parity'' problem, we show a mean-reverting strategy is optimal.
    Date: 2022–07
  3. By: Shraddha Pathak; Ankur A. Kulkarni
    Abstract: During an epidemic, the information available to individuals in the society deeply influences their belief of the epidemic spread, and consequently the preventive measures they take to stay safe from the infection. In this paper, we develop a scalable framework for ascertaining the optimal information disclosure a government must make to individuals in a networked society for the purpose of epidemic containment. This problem of information design problem is complicated by the heterogeneous nature of the society, the positive externalities faced by individuals, and the variety in the public response to such disclosures. We use a networked public goods model to capture the underlying societal structure. Our first main result is a structural decomposition of the government's objectives into two independent components -- a component dependent on the utility function of individuals, and another dependent on properties of the underlying network. Since the network dependent term in this decomposition is unaffected by the signals sent by the government, this characterization simplifies the problem of finding the optimal information disclosure policies. We find explicit conditions, in terms of the risk aversion and prudence, under which no disclosure, full disclosure, exaggeration and downplay are the optimal policies. The structural decomposition results are also helpful in studying other forms of interventions like incentive design and network design.
    Date: 2022–07
  4. By: David Bartl; Mikl\'os Pint\'er
    Abstract: We consider transferable utility cooperative games with infinitely many players and the core understood in the space of bounded additive set functions. We show that, if a game is bounded below, then its core is non-empty if and only if the game is balanced. This finding is a generalization of Schmeidler's (1967) original result ``On Balanced Games with Infinitely Many Players'', where the game is assumed to be non-negative. We furthermore demonstrate that, if a game is not bounded below, then its core might be empty even though the game is balanced; that is, our result is tight. We also generalize Schmeidler's (1967) result to the case of restricted cooperation too.
    Date: 2022–07
  5. By: Constantin Mellios (PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne); Anh Ngoc Lai (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper studies, in a unified and dynamic framework, the impact of fund managers compensation (symmetric and asymmetric fees including a penalty component) as well as their investment in the fund when managers exhibit a loss aversion utility function. Contrary to the vast majority of the existing literature, the benchmark portfolio, relative to which a fund's performance is measured, is risky. The optimal portfolio value comprises a call option and a term resembling the optimal value when the benchmark is riskless. The proportion invested in the risky security is a speculative position, while the fraction invested in the benchmark contains both a hedging addend and a speculative element. Our model and simulations show that (i) a risky benchmark substantially modifies the manager's allocation compared to a riskless benchmark; (ii) optimal positions are less risky when the manager is compensated by symmetric fees or faces a penalty; (iii) a relatively large manager's stake (30%) in the fund considerably reduces her risk-taking behaviour and results in an almost identical terminal portfolio value for the different fees schemes; (iv) optimal weights significantly react to different parameter values; (v) these results may have important implications on regulation.
    Abstract: L'objectif de cet article est d'étudier, dans un cadre unifié et dynamique, l'impact de la rémunération des gestionnaires de fonds (commission de performance symétrique ou non-symétrique avec potentiellement un malus), ainsi que leur propre investissement dans le fond lorsqu'ils sont caractérisés par une fonction d'utilité de type « aversion aux pertes ». Contrairement à la littérature existante, la performance du fond est appréciée par rapport à une référence (un indice, par exemple) risquée. Les principales conclusions de notre modèle et de nos simulations sont les suivantes : (i) une référence risquée modifie sensiblement l'allocation d'actifs ; (ii) les proportions optimales sont moins risquées dans le cas d'une commission de performance symétrique ; (iii) la détention par le gestionnaire d'une part relativement importante (30%) du fonds altère son comportement risqué et permet d'obtenir une valeur terminale du portefeuille quasi-identique quel que soit le type de rémunération ; (iv) les proportions optimales sont sensibles aux variations des valeurs des paramètres ; (v) ces résultats peuvent avoir des conséquences sur la régulation.
    Date: 2022
  6. By: Vincent Meisner; Jonas von Wangenheim
    Abstract: Evidence suggests that participants in strategy-proof matching mechanisms play dominated strategies. To explain the data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal equilibria. We find that non-truthful preference submissions can be strictly optimal if and only if they are top-rank monotone. In equilibrium, inefficiency or justified envy may arise in seemingly stable or efficient mechanisms. Specifically, students who are more loss averse or less confident than their peers obtain suboptimal allocations.
    Date: 2022–07
  7. By: Salvatore Nunnari; Massimiliano Pozzi
    Abstract: We conduct an interdisciplinary meta-analysis to aggregate the knowledge from empirical estimates of inequality aversion reported from 1999 to 2022. In particular, we examine 85 estimates of disadvantageous inequality aversion (or envy) and advantageous inequality aversion (or guilt) from 26 articles in economics, psychology, neuroscience and computer science that structurally estimate the Fehr and Schmidt (1999) model of social preferences. Our meta-analysis supports the presence of inequality concerns: the mean envy coefficient is 0:426 with a 95% probability that the true value lies in the interval [0:240; 0:620]; the mean guilt coefficient is 0:290 with a 95% probability that the true value lies in the interval [0:212; 0:366]. Moreover, we observe high levels of heterogeneity, both across studies and across individuals, with estimated parameters sensitive to the experimental task and the subject population.
    Keywords: social preferences, inequality aversion, inequity aversion, envy, guilt, meta-analysis, multi-level random-effects model, Bayesian hierarchical model
    JEL: C90 C11 D63 D91
    Date: 2022
  8. By: Michael Dinerstein; Isaac M. Opper
    Abstract: What happens when employers would like to screen their employees but only observe a subset of output? We specify a model in which heterogeneous employees respond by producing more of the observed output at the expense of the unobserved output. Though this substitution distorts output in the short-term, we derive three sufficient conditions under which the heterogenous response improves screening efficiency: 1) all employees place similar value on staying in their current role; 2) the employees' utility functions satisfy a variation of the traditional single-crossing condition; 3) employer and worker preferences over output are similar. We then assess these predictions empirically by studying a change to teacher tenure policy in New York City, which increased the role that a single measure -- test score value-added -- played in tenure decisions. We show that in response to the policy teachers increased test score value-added and decreased output that did not enter the tenure decision. The increase in test score value-added was largest for the teachers with more ability to improve students' untargeted outcomes, increasing their likelihood of getting tenure. We find that the endogenous response to the policy announcement reduced the screening efficiency gap -- defined as the reduction of screening efficiency stemming from the partial observability of output -- by 28%, effectively shifting some of the cost of partial observability from the post-tenure period to the pre-tenure period.
    JEL: D23 I21 J08 J24 J41
    Date: 2022–07
  9. By: Emerson Melo
    Abstract: In this paper we study a rational inattention model in environments where the decision maker faces uncertainty about the true prior distribution over states. The decision maker seeks to select a stochastic choice rule over a finite set of alternatives that is robust to prior ambiguity. We fully characterize the distributional robustness of the rational inattention model in terms of a tractable concave program. We establish necessary and sufficient conditions to construct robust consideration sets. Finally, we quantify the impact of prior uncertainty, by introducing the notion of \emph{Worst-Case Sensitivity}.
    Date: 2022–08
  10. By: Chatterjee, Sidharta
    Abstract: In this paper, I discuss about the axiomatic basis of rational choice theory—the theory that is behind making rational choice and decisions. To make rational choices, we would require thinking rationally and understanding the reason and logic behind what makes a choice rational, and how we need to choose rationally. Decisions are made under various circumstances, i.e., under risk, and often under compulsion. In social choice theory, decisions are made by different types of decision making entities, i.e., committees, groups, individuals and collective judgments by various types of organizations, etc. This paper highlights these issues and addresses the fundamental tenets of making rational choices by examining and following the previous workings of experts on this field. As such, it introduces a novel concept and the idea of Social Choice Rationality in choosing what’s rational.
    Keywords: Choice, decision making, rational choice, social choice theory, Social Choice Rationality, Social welfare, welfare actions
    JEL: I3 Z1
    Date: 2022–07–25
  11. By: Goller, Daniel; Heiniger, Sandro
    Abstract: We propose a statistical framework for quantifying the importance of single events that do not provide intermediate rewards but offer implicit incentives through the reward structure at the end of a multi-event contest. Applying the framework to primary elections in the US, where earlier elections have greater importance and influence, we show that schedule variations can mitigate the problem of front-loading elections. When applied to European football, we demonstrate the utility and meaningfulness of quantified event importance in relation to the in-match performance of contestants, to improve outcome prediction and to provide an early indication of public interest.
    Keywords: Event importance, Football, Front-loading, Incentives, Multi-event contest
    JEL: C15 C53 D72 Z20
    Date: 2022–07
  12. By: Tan Gan
    Abstract: This paper studies the pricing problem of selling a unit good to a prospect theory buyer. With non-negative constraints on the price, the optimal profit is always bounded. This suggests a distinction between random pricing and gambling, where the principal can extract infinite profit. If the buyer is naive about her dynamic inconsistency, the uniquely optimal dynamic mechanism is to sell a "loot box" that delivers the good with some constant probability in each period. Until she finally gets the good, the consumer always naively believes she will "try her luck" just one last time. In contrast, if the buyer is sophisticated, the uniquely optimal dynamic mechanism includes a "pity system", in which after successive failures in getting the good from all previous loot boxes, the buyer can purchase the good at full price.
    Date: 2022–08
  13. By: Gehde-Trapp, Monika; Klingler, Linda
    Abstract: In this paper, we explore whether male and female fund managers react differently to sentiment. Our main idea is that sentiment indicates mispricings of stocks relative to their fundamental values, and that rational fund managers should profit from these mispricings. As trading against the mispricing is risky, we hypothesize that female fund managers take on less aggressive positions. Indeed, our empirical results show that male fund managers hold portfolios with significantly higher total fund risk and unsystematic risk when sentiment is bad. For female fund managers, we find significantly lower levels in unsystematic risk when sentiment is bad. This difference in risk-taking behavior does not affect fund returns or risk-adjusted performance.
    Keywords: mutual funds,gender,sentiment,investment behavior
    JEL: G11 G23 G40
    Date: 2022
  14. By: Nicolas Bijon (UPR Recyclage et risque - Recyclage et risque - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement, PEnSTer - PEnSTer: Pollutions Environnement Santé Territoire - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier, ERT - IMT Mines Alès - ERT - IMT - MINES ALES - IMT - MINES ALES - IMT - Institut Mines-Télécom [Paris] - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier, Veolia Environnement Research and Innovation); Juliette Cerceau (PEnSTer - PEnSTer: Pollutions Environnement Santé Territoire - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier, ERT - IMT Mines Alès - ERT - IMT - MINES ALES - IMT - MINES ALES - IMT - Institut Mines-Télécom [Paris] - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier); Magali Dechesne (Veolia Environnement Research and Innovation); Guillaume Junqua (PEnSTer - PEnSTer: Pollutions Environnement Santé Territoire - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier, ERT - IMT Mines Alès - ERT - IMT - MINES ALES - IMT - MINES ALES - IMT - Institut Mines-Télécom [Paris] - HSM - Hydrosciences Montpellier - IRD - Institut de Recherche pour le Développement - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier); Tom Wassenaar (UPR Recyclage et risque - Recyclage et risque - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement)
    Abstract: In an industrial symbiosis initiative (IS-I), an initiating actor faced with a situation aims to enroll other actors in a collective action, or response, to address the situation. The rational myth theory embeds this "situation-response" pair. This paper explores the relevance of rational myth, along with that of plausible promise, to understand the emergence and development of IS-Is. We adapt the definition of these two concepts to IS and illustrate how they take shape with real case studies, by conducting the qualitative analysis of 14 French IS-Is. We demonstrate the potential of this framework to shed new light on IS-Is, and address a new range of questions for the dynamic analysis of initiatives. This paves the way to study the role of plausible promises in the initiation and development of IS-Is, and the design of discourses that enhance initiatives in situations of high potential of synergy.
    Keywords: Industrial symbiosis,Plausible promise,Rational myth,Discourse,Case studies
    Date: 2022
  15. By: Salah Jadda (INPT - Institut National des Postes et Télécommunications [Rabat]); Nawfal Acha (INPT - Institut National des Postes et Télécommunications [Rabat]); Hafid Barka (INPT - Institut National des Postes et Télécommunications [Rabat])
    Abstract: Information and Communication Technologies (ICT) constitute a tool for strategic transformation, value creation, economic growth and the development of public and private organizations. ICT spending represents a very important part of the investment budget in public organizations. Research has shown that value creation related to these investments can take place only if good IT governance is established using appropriate ICT Strategic Alignment (SA) and Project Portfolio Management (MPP) approaches. The aim of this article is to help shed light on how SA and MPP techniques affect ICT investment decision-making and have a decisive influence on performance. Therefore, we propose a framework to measure the impact of the SA and the ICT PPM on both rational decision-making on ICT investments, as well as on the reduction of the behaviors effect linked to personal interests during the choices of investments, innovation and procedures simplification.
    Abstract: Les Technologies de l'Information et de Communication (TIC) constituent un outil de transformation stratégique, de création de valeur, de croissance économique et du développement des organisations publiques et privées. Les dépenses relatives aux TIC représentent une part très importante du budget d'investissement des organisations publiques. Les recherches ont montré que la création de valeurs relatives à ces investissements ne peut avoir lieu que si on instaure une bonne gouvernance des TIC en utilisant des approches adéquates d'Alignement Stratégique (AS) des TIC et de Management de Portefeuille de Projets (MPP). L'objectif de cet article est d'éclaircir comment les techniques d'AS et de MPP affectent les prises de décision en investissement TIC et ont une influence déterminante sur la performance. Ainsi, nous proposons un cadre qui mesure l'impact de l'AS et du MPP des TIC sur la prise de décisions rationnelles concernant les investissements TIC, sur la réduction de l'effet des comportements liés aux intérêts personnels lors des choix des investissements, sur l'innovation et sur la simplification des procédures.
    Date: 2021
  16. By: Jonas Dovern; Lena Sophia Müller; Klaus Wohlrabe
    Abstract: Using new survey data on quantitative growth expectations of firms in Germany, we show that firms resort to local information when forming expectations about aggregate growth. Firms extrapolate from the economic situation in their county, industry growth and their individual business situation. The effect is particularly strong for small firms and explains part of the high expectation dispersion across firms. Furthermore, we show that growth expectations are correlated with employment and investment decisions of firms, highlighting that differences in expectations do indeed seem to lead to differences in actual firm decisions. Our results confirm predictions of theoretical models with rational inattention.
    Keywords: GDP expectations, expectation heterogeneity, disagreement, rational inattention, ifo business tendency survey
    JEL: D84 E20 E32
    Date: 2022

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