nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2022‒10‒24
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Efficient Allocations under Ambiguous Model Uncertainty By Hara, Chiaki; Mukerji, Sujoy; Riedel, Frank; Tallon, Jean Marc
  2. Lost in objective translation: Awareness of unawareness when unknowns are not simply unknowns By Marie-Louise Vierø
  3. Report-Dependent Utility and Strategy-Proofness By Meisner, Vincent
  4. Optimal portfolio selection of many players under relative performance criteria in the market model with random coefficients By Jeong Yin Park
  6. A Household’s Preferences Vary Depending on Whether Incomes Are Permanent or Temporary: A Solution to the Time-Inconsistency Problem and Equity-Premium Puzzle By Harashima, Taiji
  7. Comparative Incompleteness: Measurement, Behavioral Manifestations and Elicitation By Edi Karni; Marie-Louise Vierø
  8. Sentiment and speculation in a market with heterogeneous beliefs By Martin, Ian; Papadimitriou, Dimitris
  9. Are preferences for work reference dependent or time nonseparable? New experimental evidence By Sam Cosaert; Mathieu Lefebvre; Ludivine Martin
  10. Mind the framing when studying social preferences in the domain of losses By Antinyan, Armenak; Corazzini, Luca; Fišar, Miloš; Reggiani, Tommaso

  1. By: Hara, Chiaki (Center for Mathematical Economics, Bielefeld University); Mukerji, Sujoy (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University); Tallon, Jean Marc (Center for Mathematical Economics, Bielefeld University)
    Abstract: We investigate consequences of ambiguity on efficient allocations in an exchange economy. Ambiguity is embodied in the model uncertainty perceived by the consumers: they are unsure what would be the appropriate probability measure to apply to evaluate consumption and keep in consideration a set $\mathcal{P}$ of alternative probabilistic laws. Consumers are heterogeneously ambiguity averse with smooth ambiguity preferences and $\mathcal{P}$ is point identified, and the aggregate risk is ambiguous. Our analysis addresses, in particular, the full range of set-ups where under expected utility the efficient consumption sharing rule is a linear function of the aggregate endowment. We identify the systematic differences ambiguity aversion introduces to efficient sharing rules in these environments. We also characterize the representative consumer and use it to find implications of heterogeneity in ambiguity aversion for the pricing kernel. The pricing kernel is shown to be qualitatively different under heterogeneity and has the empirically compelling implication that the Sharpe ratio is counter-cyclical.
    Date: 2022–10–07
  2. By: Marie-Louise Vierø (Department of Economics and Business Economics, Aarhus University)
    Abstract: This paper models decision makers who are cognisant of their own potential unawareness and who may have an a priori sense that not all unknowns are equal. Karni and Vierø (2017) provide a choice theoretic model of growing awareness when the decision maker has awareness of her unawareness. Their framework, together with their axiomatic structure, results in all potential consequences that the decision maker is unaware of being treated identically from an a priori point of view. However, in the context of growing awareness, one can argue for differences in valuations a priori. Different types of surprises could be anticipated in different situations. This paper proposes a model that accommodates such a priori differences in anticipation. It allows for subjectively different unknowns and provides a representation of preferences that has an expected utility structure, but where the attitudes towards differently perceived unknowns are allowed to differ.
    Keywords: Awareness, Unawareness, Unknown unknowns, Utility of indescribable consequences, Attitudes towards the unknown
    JEL: D8 D81 D83
    Date: 2022–09–26
  3. By: Meisner, Vincent (TU Berlin)
    Abstract: Despite the truthful dominant strategy, participants in strategy-proof mechanisms submit manipulated preferences. In our model, participants dislike rejections and enjoy the confirmation from getting what they declared most desirable. Formally, the payoff from a match decreases in its position in the submitted ranking such that a strategic trade-off between preference intensity and match probability arises. This trade-off can trigger the commonly observed self-selection strategies. We show that misrepresentations can persist for arbitrarily small report-dependent components. However, honesty is guaranteed to be optimal if and only if there is no conflict between the quality and feasibility of a match.
    Keywords: market design; matching; school choice; self-regarding preferences; strategy-proof mechanisms;
    JEL: D47 D78 D81 D91
    Date: 2021–10–21
  4. By: Jeong Yin Park
    Abstract: We study the optimal portfolio selection problem under relative performance criteria in the market model with random coefficients from the perspective of many players game theory. We consider five random coefficients which consist of three market parameters which are used in the risky asset price modeling and two preference parameters which are related to risk attitude and impact of relative performance. We focus on two cases; either all agents have Constant Absolute Risk Aversion (CARA) risk preferences or all agents have Constant Relative Risk Aversion (CRRA) risk preferences for their investment optimization problem. For each case, we show that the forward Nash equilibrium and the mean field equilibrium exist for the n-agent game and the corresponding mean field stochastic optimal control problem, respectively. To extend the n-agent game to the continuum of players game, we introduce a measure dependent forward relative performance process and apply an optimization over controlled dynamics of McKean-Vlasov type. We conclude that our optimal portfolio formulas extend the corresponding results of the market model with constant coefficients.
    Date: 2022–08
  5. By: Chang Koo Chi (Yonsei Univ); Kyoung Jin Choi (University of Calgary Haskayne School of Business)
    Abstract: This paper presents a dual approach to the standard agency model. We formulate the dual problem corresponding to the principal-agent problem under the assumption that the firstorder approach (FOA) is valid. This dual formulation generates a convex conjugate of a distinctive form, which transforms the agent’s utility from compensation into a dual functional. The dual problem features a simple convex structure, which enables us to perform a comprehensive analysis for the primal problem. We derive novel and more tractable conditions for existence and uniqueness of an optimal FOA contract in terms of the functional. Furthermore, the dual approach provides us with illuminating insights into the previous nonexistence results.
    Keywords: Existence, moral hazard, principal-agent models, Lagrange duality
    JEL: D82 D86
    Date: 2022–06
  6. By: Harashima, Taiji
    Abstract: A household’s preferences are usually assumed not to vary temporally or depending on the objects to which they are applied, but this assumption is often inconsistent with empirical estimates, for example, with the time-inconsistency problem of the time preference rate and the equity-premium puzzle. I show that these inconsistencies are generated because a household’s preferences vary depending on whether they are applied to permanent or temporary incomes. Preferences applied to permanent incomes are anchored to the steady state or a balanced growth path, but those for temporary incomes are not. Hence, the former are fixed and unchanged, but the latter can take various values depending on conditions.
    Keywords: Equity premium; Permanent income; Risk aversion; Temporary income; Time inconsistency; Time preference
    JEL: D10 D81 E21
    Date: 2022–10–01
  7. By: Edi Karni (Johns Hopkins University); Marie-Louise Vierø (Department of Economics and Business Economics, Aarhus University)
    Abstract: This paper introduces measures of overall incompleteness of preference relations under risk and uncertainty, as well as measures of incompleteness of beliefs and tastes. These measures are used to define “more incomplete than†relations among different preference relations. We show how greater incompleteness is manifested in the representations of decision makers’ preferences and illustrate its behavioral implications in a simple portfolio choice problem. In addition, the paper introduces incentive compatible schemes of eliciting the degrees of overall incompleteness and those of beliefs and tastes.
    Keywords: Incomplete preferences, Knightian uncertainty, Comparative incompleteness, Elicitation mechanisms
    JEL: D81
    Date: 2022–09–26
  8. By: Martin, Ian; Papadimitriou, Dimitris
    Abstract: We present a model featuring risk-averse investors with heterogeneous beliefs. Individuals who are correct in hindsight—whether through luck or judgment—get rich, so sentiment is bullish following good news and bearish following bad news. Sentiment makes extreme outcomes far more important for pricing and has asymmetric effects on left- and right-skewed assets. Investors take speculative positions that can conflict with their fundamental views. Moderate investors are contrarian: they trade against excess volatility created by extremists. All investors view speculation as socially costly; but they also think it is in their self-interest, and the market can collapse entirely if speculation is banned.
    Keywords: Starting Grant 639744
    JEL: D81 D83 G11 G12
    Date: 2022–08–01
  9. By: Sam Cosaert (UA - University of Antwerp); Mathieu Lefebvre (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Ludivine Martin (LISER - Luxembourg Institute of Socio-Economic Research, 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: Tests of labor supply models often rely on wages. However, wage variation alone generally cannot disentangle the classical time separable model and its extensions: reference dependent preferences (income targeting) and time nonseparable preferences (disutility spillovers; timing-specific preferences). We set up a novel laboratory experiment in which individuals choose their working time. We vary, independently, wages, historical income paths, and cumulative past work. We also vary the timing of experimental sessions. Statistical tests and stochastic revealed preference methods cannot reject the classical model in favor of income targeting or disutility spillovers, but the data suggest that labor supply varies by time-of-the-day.
    Keywords: Working time,Lab experiment,Time separable model,Income targeting,Disutility spillovers,Timing-specific preferences,Revealed preferences
    Date: 2022–09
  10. By: Antinyan, Armenak (Cardiff Business School, Cardiff University.); Corazzini, Luca; Fišar, Miloš; Reggiani, Tommaso (Cardiff Business School)
    Abstract: There has been an increasing interest in altruistic behaviour in the domain of losses recently. Nevertheless, there is no consensus in whether the monetary losses make individuals more generous or more selfish. Although almost all relevant studies rely on a dictator game to study altruistic behaviour, the experimental designs of these studies differ in how the losses are framed, which may explain the diverging findings. Utilizing a dictator game, this paper studies the impact of loss framing on altruism. The main methodological result is that the dictators’ prosocial behaviour is sensitive to the loss frame they are embedded in. More specifically, in a dictator game in which the dictators have to share a loss between themselves and a recipient, the monetary allocations of the dictators are more benevolent than in a standard setting without a loss and in a dictator game in which the dictators have to share what remains of their endowments after a loss. These differences are explained by the different social norms that the respective loss frames invoke.
    Keywords: loss; framing; altruism; dictator game; experiment; social norms.
    JEL: C91 D02 D64
    Date: 2022–10

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