
on Utility Models and Prospect Theory 
By:  Michael Greinecker; Christoph Kuzmics 
Abstract:  A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing subjective expected utility. However, this paper shows that when traders have access to limit orders, all investment behavior of an ambiguityaverse decisionmaker is observationally equivalent to the behavior of a subjective expected utility maximizer with the same risk preferences; ambiguity aversion has no additional explanatory power. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.10804&r= 
By:  Yao Thibaut Kpegli (Univ Lyon, Université Lyon 2, GATE UMR 5824, F69130 Ecully, France); Maria Alejandra Erazo Diaz (Univ Lyon, Université Lyon 2, GATE UMR 5824, F69130 Ecully, France) 
Abstract:  This paper proposes a new method to measure beliefs and ambiguity attitudes towards events that are not necessarily equally likely and belong to a discrete set (i.e., discrete sources of uncertainty). Our method increases robustness to misspecification and allows flexibility in parametric choices compared to previous methods. We implement our method experimentally to both equal and different sources of uncertainty in two contexts: trust and coordination games. We find two main results. First, for equal sources of uncertainty, our method successfully reveals that subjects have contextindependent beliefs on events, but contextdependent utility and weighting functions. This result indicates that comparing different sources of uncertainty requires a complete measurement of the utility and weighting functions. Second, different sources of uncertainty where the events are not equally likely lead to an increase in likelihood insensitivity, which indicates that the beliefs formation process of unknown events is cognitively demanding. 
Keywords:  Subjective beliefs; Ambiguity attitudes; Sources of uncertainty; Trust game; Coordination game 
JEL:  D81 C91 
Date:  2022 
URL:  http://d.repec.org/n?u=RePEc:gat:wpaper:2212&r= 
By:  Anindya Bhattacharya 
Abstract:  In this paper we provide three new results axiomatizing the core of games in characteristic function form (not necessarily having transferable utility) obeying an innocuous condition (that the set of individually rational payoff vectors is bounded). One novelty of this exercise is that our domain is the {\em entire} class of such games: i.e., restrictions like "nonlevelness" or "balancedness" are not required. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.01690&r= 
By:  Amine Ouazad 
Abstract:  Measuring beliefs about natural disasters is challenging. Deep outofthemoney options allow investors to hedge at a range of strikes and time horizons, thus the 3dimensional surface of firmlevel option prices provides information on (i) skewed and fattailed beliefs about the impact of natural disaster risk across space and time dimensions at daily frequency; and (ii) information on the covariance of wildfireexposed stocks with investors' marginal utility of wealth. Each publiclytraded company's daily surface of option prices is matched with its network of establishments and wildfire perimeters over two decades. First, wildfires affect investors' risk neutral probabilities at short and long maturities; investors price asymmetric downward tail risk and a probability of upward jumps. The volatility smile is more pronounced. Second, comparing riskneutral and physical distributions reveals the optionimplied risk aversion with respect to wildfireexposed stock prices. Investors' marginal utility of wealth is correlated with wildfire shocks. Optionimplied risk aversion identifies the wildfireexposed share of portfolios. For risk aversions consistent with Barro (2012), equity options suggest (i) investors hold larger shares of wildfireexposed stocks than the market portfolio; or (ii) investors may have more pessimistic beliefs about wildfires' impacts than what observed returns suggest, such as pricing lowprobability unrealized downward tail risk. We calibrate options with models featuring both upward and downward risk. Results are consistent a significant pricing of downward jumps. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.06930&r= 
By:  Lina Lozano; Ernesto Reuben (Division of Social Science) 
Abstract:  Recent research has found that competitive behavior measured in experiments strongly predicts individual differences in educational and labor market outcomes. However, there is no consensus on the underlying factors behind competitive behavior in these experiments. Are participants who compete more capable, more confident, and more tolerant of risk, or are they competing because they enjoy competition per se? In this study, we present an experiment designed to measure individualsâ€™ preferences for competition. Compared to previous work, our experiment rules out risk preferences by design, measures beliefs more precisely, and allows us to measure the magnitude of preferences for competition. In addition, we collect multiple decisions per participant, which lets us evaluate the impact of noisy decisionmaking. We find strong evidence that many individuals possess preferences for competition. Most participants are either reliably competitionseeking or competition averse, and their choices are highly consistent with expected utility maximization. We also find that preferences for competition depend on the number of competitors but not on the participantsâ€™ gender. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:nad:wpaper:20220078&r= 
By:  Rosenmüller, Joachim (Center for Mathematical Economics, Bielefeld University) 
Abstract:  We introduce the MaschlerPerlesShapley value for NTU games composed by smooth bodies. This waywe extend the MPS value established for games composed by Cephoids (“sums of deGua Simplices”). The development is parallel to the one of the (generalized) MaschlerPerles bargaining solution. For Cephoidal bargaining problems this concept is treated in ([4], [11]). It is extended to smooth bargaining problems by the construction of surface measures. Such measures generalize the MaschlerPerles approach in two dimensions via a line integral  what the authors call their “donkey cart” ([6], [11]). The MaschlerPerlesShapley value for Cephoidal NTU Games extends the Cephoidal approach to Non Transferable Utility games with feasible sets consisting of Cephoids. The presentation is found in [10] and [11]. Using these results we formulate the MaschlerPerlesShapley value for smooth NTU games. We emphasize the intuitive justification of our concepts. The original MaschlerPerles approach is based on the axiom of superadditivity which we rate much more appealing than competing axioms like IIA etc. As a consequence, the construction of a surface measure (MaschlerPerles' line integral) is instigated which renders concessions and gains of players during the bargaining process to be represented in a common space of "adjusted utility”. Within this utility space side payments  transfer of utils  are feasible interpersonally as well as intrapersonally. Therefore, the barycenter/midpoint of the adjusted utility space is the natural base for the solution concept. This corresponds precisely to the MaschlerPerles “donkey card” reaching the solution by calling for equal concessions in terms of their line integral. In addition, the adjusted utility space carries an obvious linear structure  thus admitting expectations in the sense of the Shapley value or "von NeumannMorgenstern utility". Consequently, we obtain a generally acceptable concept for bargaining problems as well as NTU games in the Cephoidal and in the smooth domain. We collect the details of this reasoning along the development of our theory in Remarks 1.7., 2.6., and 3.2.. These remarks constitute a comprehensive view on MPS concepts for Cephoidal and smooth NTU games. 
Date:  2022–08–31 
URL:  http://d.repec.org/n?u=RePEc:bie:wpaper:668&r= 
By:  Ruben Bostyn; Laurens Cherchye; Bram De Rock; Frederic Vermeulen 
Abstract:  We make use of rich micro data from the Belgian MEqIn survey, which contains detailed information on individual consumption, public consumption inside households and time use. We explain the observed household behavior by means of a collective model that integrates marriage market restrictions on intrahousehold allocation patterns. We adopt a revealed preference approach that abstains from any functional form assumptions on individual utility functions or intrahousehold decision processes. This allows us to (set) identify the sharing rule, which governs the intrahousehold sharing of time and money, and to quantify economies of scale within households. We use these results to conduct a robust and meaningful individual welfare and inequality analysis, hereby highlighting the important role of detailed consumption and time use data. 
Keywords:  collective model, time use, intrahousehold inequality, individual welfare, revealed preferences 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:eca:wpaper:2013/348466&r= 
By:  Zhongze Cai; Hanzhao Wang; Kalyan Talluri; Xiaocheng Li 
Abstract:  Choice modeling has been a central topic in the study of individual preference or utility across many fields including economics, marketing, operations research, and psychology. While the vast majority of the literature on choice models has been devoted to the analytical properties that lead to managerial and policymaking insights, the existing methods to learn a choice model from empirical data are often either computationally intractable or sample inefficient. In this paper, we develop deep learningbased choice models under two settings of choice modeling: (i) featurefree and (ii) featurebased. Our model captures both the intrinsic utility for each candidate choice and the effect that the assortment has on the choice probability. Synthetic and real data experiments demonstrate the performances of proposed models in terms of the recovery of the existing choice models, sample complexity, assortment effect, architecture design, and model interpretation. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.09325&r= 
By:  Gorbunov, Vladimir 
Abstract:  The problem of multiproduct consumer demand in modern neoclassical economic theory is that this theory contains a formal normative mathematical theory of individual demand, but does not contain a positive theory of market demand– an object of real interest for economistspractitioners and governments. The consequence of this failure is the lack of a positive theory of value / price, based on the theory of economic equilibrium, and reasonable methods for analysing market demand, in particular, the calculation of economic (analytical) demand indices reflecting consumer preferences of the population. The demand problem is analysed substantively and formally within the framework of general scientific methodology. It is shown that Deaton's "aggregation over consumers" condition, introduced in Stone's heuristic analysis of market demand, is superfluous. The paper presents basics of the author’s scientific holistic theory of market demand, based on the rejection of the unrealistic theory of the individual maximizing his (ordinal) utility function, and the nonparametric method of its verification, within the framework of which analytical indexes of prices and quantities of consumption of market demand are being built. Recent articles confirming the work of the theory on real, highdimensional data are pointed out. 
Keywords:  Economics crisis; market demand; methodological individualism; heterodox Economics, scientific methodology; verification; economic indexes 
JEL:  B41 B50 C43 D11 
Date:  2022–08–19 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:114256&r= 
By:  Michael Monoyios; Oleksii Mostovyi 
Abstract:  We investigate the stability of the EpsteinZin problem with respect to small distortions in the dynamics of the traded securities. We work in incomplete market model settings, where our parametrization of perturbations allows for joint distortions in returns and volatility of the risky assets and the interest rate. Considering empirically the most relevant specifications of risk aversion and elasticity of intertemporal substitution, we provide a condition that guarantees the convexity of the domain of the underlying problem and results in the existence and uniqueness of a solution to it. Then, we prove the convergence of the optimal consumption streams and the value functions in the limit when the model perturbations vanish. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.09895&r= 
By:  JeanMichel Benkert 
Abstract:  The endowment and attachment effect are empirically welldocumented in bilat eral trade situations. Yet, the theoretical literature has so far failed to formally identify these effects. We fill this gap by introducing expectationsbased loss aversion, which can explain both effects, into the classical setting by Myerson and Satterth waite (1983). This allows us to formally identify the endowment and attachment effect and study their impact on information rents, allowing us to show that, in contrast to other behavioral approaches to the bilateral trade problem, the impossi bility of inducing materially effcient trade persists in the presence of loss aversion. We then turn to the design of optimal mechanisms and consider the problem of maximizing the designer's revenue as well as gains from trade. We find that the designer optimally provides the agents with full insurance in the money dimension and, depending on the distribution of types, optimally increases or decreases the trade frequency in the presence of loss aversion. 
Keywords:  Bilateral trade, loss aversion, mechanism design, endowment and attachment effect 
JEL:  C78 D01 D02 D82 D84 D90 
Date:  2022–07 
URL:  http://d.repec.org/n?u=RePEc:ube:dpvwib:dp2203&r= 
By:  Michel Beine (University of Luxembourg) 
Abstract:  Estimating the impact of risk aversion on emigration at the individual level is complicated by selection issues. In this presentation, I use original data from Albania on mobility intentions and elicited risk aversion to provide causal estimates on this relationship. My identification strategy relies on the occurrence of two earthquakes during data collection that unambiguously led to upward shifts in risk aversion as shown in an article by Beine et al. (2021). While OLS estimates fail to capture a (negative) relationship between risk aversion and emigration intention, a control function strategy using the two earthquakes as instruments uncovers such a relationship. I argue that my results highlight a new channel through which risk preferences explain the trapped population phenomenon documented in the climate change and migration literature. 
Date:  2022–08–01 
URL:  http://d.repec.org/n?u=RePEc:boc:fsug22:05&r= 
By:  Bryce McLaughlin; Jann Spiess 
Abstract:  When we use algorithms to produce recommendations, we typically think of these recommendations as providing helpful information, such as when risk assessments are presented to judges or doctors. But when a decisionmaker obtains a recommendation, they may not only react to the information. The decisionmaker may view the recommendation as a default action, making it costly for them to deviate, for example when a judge is reluctant to overrule a highrisk assessment of a defendant or a doctor fears the consequences of deviating from recommended procedures. In this article, we consider the effect and design of recommendations when they affect choices not just by shifting beliefs, but also by altering preferences. We motivate our model from institutional factors, such as a desire to avoid audits, as well as from wellestablished models in behavioral science that predict loss aversion relative to a reference point, which here is set by the algorithm. We show that recommendationdependent preferences create inefficiencies where the decisionmaker is overly responsive to the recommendation, which changes the optimal design of the algorithm towards providing less conservative recommendations. As a potential remedy, we discuss an algorithm that strategically withholds recommendations, and show how it can improve the quality of final decisions. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.07626&r= 
By:  Mustapha Touré; Thomas G. Poder 
Abstract:  The increasing demand on health systems combined with the scarcity of available resources makes it imperative to optimise them through informed choices. The concept of qualityadjusted life year (QALY) arises in this purpose and uses healthrelated quality of life (HRQoL) instruments, including generic instruments. However, many differences can be noted between those instruments. The general observation is that almost all generic instruments contain one or more dimensions related to physical health (e.g., disability, discomfort, pain) at the expense of other mental or social dimensions. To overcome this limitation, a new instrument has been created, aiming to be a more comprehensive and balanced measure of global healthrelated quality of life (GHRQoL). This report presents the key steps in the creation of this instrument as well as the results obtained in measuring the GHRQoL of Quebeckers in spring 2021. A new generic instrument, the 13MD, composed of 33 items with 5 to 7 levels each, was thus developed. The creation of a value set allowing the conversion of health states into utility scores will allow its use in costutility analyses. La demande croissante à laquelle font face les systèmes de santé combinée à la rareté des ressources disponibles rend impératif leur optimisation pour effectuer des choix éclairés. Le concept d’année de vie ajustée par la qualité (AVAQ) s’inscrit dans ce cadre et utilise des instruments de mesure de qualité de vie reliée à la santé (QVRS), parmi lesquels des instruments génériques. Cependant, de nombreuses différences peuvent être observées entre ces instruments. Le constat général est que quasiment tous les instruments génériques contiennent une ou plusieurs dimensions liées à la santé physique (p. ex. incapacité, inconfort, douleur) au détriment d'autres dimensions d’ordre mentales ou sociales. Afin de pallier cette limite, un nouvel instrument a été créé, son but étant d’être plus complet et plus équilibré dans la mesure de la qualité de vie reliée à la santé globale (QVRSG). Ce rapport présente les étapes clés de la création de cet instrument ainsi que les résultats obtenus dans la mesure de la QVRSG des québécois au printemps 2021. Ainsi un nouvel outil générique, le 13MD, composé de 33 items avec 5 à 7 niveaux chacun a été mis sur pieds. La création d’un value set permettant la conversion des états de santé en scores d’utilité permettra son utilisation dans les analyses coûtutilité. 
Keywords:  Global healthrelated quality of life,Economic assessment,Qualityadjusted lifeyear,Generic instrument, Qualité de vie reliée Ã la santé globale,évaluation économique,année de vie ajustée Ã la qualité,instrument générique 
JEL:  I18 I31 
Date:  2022–08–30 
URL:  http://d.repec.org/n?u=RePEc:cir:cirwor:2022s24&r= 
By:  Yuhki Hosoya 
Abstract:  We investigate Gale's important paper published in 1960. This paper contains an example of a candidate of the demand function that satisfies the weak axiom of revealed preference and that is doubtful that it is a demand function of some weak order. We examine this paper and first scrutinize what Gale proved. Then we identify a gap in Gale's proof and show that he failed to show that this candidate of the demand function is not a demand function. Next, we present three complete proofs of Gale's claim. First, we construct a proof that was constructible in 1960 by a fact that Gale himself demonstrated. Second, we construct a modern and simple proof using Shephard's lemma. Third, we construct a proof that follows the direction that Gale originally conceived. Our conclusion is as follows: although, in 1960, Gale was not able to prove that the candidate of the demand function that he constructed is not a demand function, he substantially proved it, and therefore it is fair to say that the credit for finding a candidate of the demand function that satisfies the weak axiom but is not a demand function is attributed to Gale. 
Date:  2022–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2208.07970&r= 