nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2023‒01‒09
eighteen papers chosen by

  1. Preference Aggregation with a Robust Pareto Criterion By Chen Li
  2. Sensitivity Analysis among Commodities and Coupons during Utility Maximization By Mohajan, Devajit; Mohajan, Haradhan
  3. Dynamic Equilibrium with Insider Information and General Uninformed Agent Utility By Jerome Detemple; Scott Robertson
  4. Dynamic and static fund separations and their stability for long-term optimal investments By Hyungbin Park; Heejun Yeo
  5. Behavioral bargaining theory: Equality bias, risk attitude, and reference-dependent utility By Yoshio Kamijo; Koji Yokote
  6. Importance of Total Coupon in Utility Maximization: A Sensitivity Analysis By Mohajan, Devajit; Mohajan, Haradhan
  7. Testing revealed preference models with unobserved randomness: a column generation approach By Thomas Demuynck; Tom Potoms
  8. Bounded arbitrage and nearly rational behavior By Leandro Nascimento
  9. Experienced versus Decision Utility: Large-Scale Comparison for Income-Leisure Preferences By Alpaslan Akay; Olivier Bargain; H.X. Jara
  10. A partial stochastic equilibrium model and its limiting behaviour By Alessandro Prosperi
  11. Are Public Employees and People with High Public Service Motivation Risk-Averse? By Reona Hayashi; So Morikawa; Takeshi Ojima; Manami Tsuruta
  12. Motivated beliefs in auctions By Riehm, Tobias
  13. On multiple discount rates and present bias By Bach Dong Xuan; Philippe Bich; Bertrand Wigniolle
  14. On the Psychology of the Relation between Optimism and Risk Taking By Dohmen, Thomas; Quercia, Simone; Willrodt, Jana
  15. The Role of Price Normalization in Imperfectly Competitive Economies By Böhm, Volker
  16. The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10 By Michael Falkenheim
  17. Economics of NFTs: The Value of Creator Royalties By Brett Hemenway Falk; Gerry Tsoukalas; Niuniu Zhang
  18. This paper presents the pilot top-down climate stress test of the Hungarian banking system over the 2020-2050 horizon. The focus is on a core indicator of financial soundness, the ratio of non-performing loans. Three scenarios are considered with different grades of compliance with the Paris Agreement. Results show that, by 2050, the sectoral excess ratios of non-compliance are scattering from 0 to 19 percentage points. By Bence Mero; Andras Borsos; Zsuzsanna Hosszu; Zsolt Olah; Nikolett Vago

  1. By: Chen Li
    Abstract: We present a new Pareto criterion to provide a minimal guidance to a social planner, who is concerned by the robustness of social decision with respect to imprecise beliefs of the true probability distribution over the state space. This new criterion, the obvious belief-free Pareto criterion, implies that the social planner is necessarily ambiguity averse. We show that given the set of reasonable beliefs and the set of individual risk preferences, the obvious belief-free Pareto criterion is the only axiom needed to characterize Maxmin Expected Utility social preferences. This result further brings us a preference aggregation theorem for Subjective Expected Utility individuals: A Maxmin Expected Utility social planner can linearly aggregate individual tastes and beliefs simultaneously if and only if s/he respects the obvious belief-free Pareto criterion.
    Keywords: Decision under uncertainty; Pareto dominance; Pareto efficiency; Preference aggregation
    JEL: D60 D71 D81
    Date: 2022–12
  2. By: Mohajan, Devajit; Mohajan, Haradhan
    Abstract: In mathematical economics utility is the vital concept. In the society utility is considered as the tendency of an object or action that increases or decreases overall happiness. This study tries to discuss sensitivity analysis during utility maximization investigation. Actually the method of Lagrange multipliers is a very useful and powerful technique in multivariable calculus. In this paper mathematical formulation of Lagrange multipliers is derived through the optimal devise. This article has taken attempts to find relations among commodities and coupons when the prices of different commodities increase or decrease.
    Keywords: Coupon constraints, Lagrange multipliers, sensitivity analysis, utility maximization
    JEL: C3 C35 C51 C61
    Date: 2022–10–01
  3. By: Jerome Detemple; Scott Robertson
    Abstract: We study a continuous time economy where agents have asymmetric information. The informed agent (``$I$''), at time zero, receives a private signal about the risky assets' terminal payoff $\Psi(X_T)$, while the uninformed agent (``$U$'') has no private signal. $\Psi$ is an arbitrary payoff function, and $X$ follows a time-homogeneous diffusion. Crucially, we allow $U$ to have von Neumann-Morgenstern preferences with a general utility function on $(0,\infty)$ satisfying the standard conditions. We prove existence of a partial communication equilibrium (PCE), where at time $0$, $U$ receives a less-informative signal than $I$. In the single asset case, this signal is recoverable by viewing the equilibrium price process over an arbitrarily short period of time, and hence the PCE is a dynamic noisy rational expectations equilibrium. Lastly, when $U$ has power (constant relative risk aversion) utility, we identify the equilibrium price in the small and large risk aversion limit.
    Date: 2022–11
  4. By: Hyungbin Park; Heejun Yeo
    Abstract: This paper investigates dynamic and static fund separations and their stability for long-term optimal investments under non-affine models. An investor maximizes the expected utility with constant relative risk aversion under an incomplete market consisting of a safe asset, several risky assets, and a single non-affine state process. The 3/2 process and inverse Bessel process are dealt as non-affine state models. We show that the dynamic optimal portfolio of this utility maximization consists of m+3 portfolios: the safe asset, the myopic portfolio, the m time-independent portfolios, the intertemporal portfolio. The intertemporal portfolio vanishes in the long run, and thus the dynamic portfolio converges to m+2 portfolios, which is called the static portfolio. We also prove that the convergence is stable under model parameter perturbations. Sensitivities of the intertemporal portfolio with respect to small parameters perturbations vanishes in the long run. The convergence rate for the intertemporal portfolio and its sensitivities are computed explicitly for the two non-affine models.
    Date: 2022–12
  5. By: Yoshio Kamijo (Waseda University); Koji Yokote (JSPS Research Fellow, Graduate School of Economics, the University of Tokyo)
    Abstract: We develop a new theory, termed the behavioral bargaining theory (henceforth, BBT), that explains various observed behaviors in bargaining experiments in a unified manner. The key idea is to modify Nash’s (1950) model by endowing the players’ utility functions with a new concept, named entitlement, that represents the amount of money the player feels entitled to receive. We first apply BBT to explain the equality bias that is widely observed in the laboratory. We argue that our explanation of the bias in terms of entitlements is more easily interpretable than the extant explanation in terms of risk attitudes. Then, we demonstrate that BBT can also explain other behavioral patterns beyond the equality bias by suitably setting entitlements. Finally, we provide empirical support to BBT by using experimental data from Takeuchi et al. (2022), where entitlements of players can be inferred from the experimental design.
    Keywords: Behavioral bargaining theory, Nash bargaining solution, Reference dependent utility, Equality bias, Equal-split norm
    Date: 2022–12
  6. By: Mohajan, Devajit; Mohajan, Haradhan
    Abstract: This study takes an attempt to discuss utility maximization policies. The property of a commodity that enables it to satisfy human wants is called utility. The sensitivity analysis is included in the operation to show optimal policy of an organization. This study deals with four commodities and two constraints, such as budget constraint, and coupon constraint. The economic predictions of future production are necessary for the sustainable production. In the study Lagrange multipliers technique is applied to operate 6×6 bordered Hessian and 6×10 Jacobian appropriately. The sensitivity analysis between commodity and total budget are discussed with detail mathematical analysis.
    Keywords: Lagrange multipliers, sensitivity analysis, total coupon, utility maximization
    JEL: C3 C31 C53 C61 D6 L3 P36
    Date: 2022–09–07
  7. By: Thomas Demuynck; Tom Potoms
    Abstract: We present a computationally fast and simple algorithm to test structural revealedpreference models in the presence of unobserved randomness. Towards this end, weoperationalize insights from random set theory. We demonstrate the practical relevanceof our results by an application to the standard intertemporal consumption model withidiosyncratic income risks and an approximate expected utility model
    Keywords: Partial identification, , , .; revealed preferences; column generation approach; random set theory
    JEL: C50 C60 D15
    Date: 2022–12
  8. By: Leandro Nascimento
    Abstract: We establish the equivalence between a principle of almost absence of arbitrage opportunities and nearly rational decision-making. The implications of such principle are considered in the context of the aggregation of probabilistic opinions and of stochastic choice functions. In the former a bounded arbitrage principle and its equivalent form as an approximately Pareto condition are shown to bound the difference between the collective probabilistic assessment of a set of states and a linear aggregation rule on the individual assessments. In the latter we show that our general principle of limited arbitrage opportunities translates into a weakening of the McFadden-Richter axiom of stochastic rationality, and gives an upper bound for the minimum distance of a stochastic choice function to another in the class of random utility maximization models.
    Date: 2022–12
  9. By: Alpaslan Akay; Olivier Bargain (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); H.X. Jara
    Abstract: Subjective well-being (SWB) data is increasingly used to perform welfare analysis. Interpreted as ‘experienced utility', it has recently been compared to ‘decision utility' using smallscale experiments most often based on stated preferences. We transpose this comparison to the framework of non-experimental and large-scale data commonly used for policy analysis, focusing on the income-leisure domain where redistributive policies operate. Using the British Household Panel Survey, we suggest a ‘deviation' measure, which is simply the difference between actual working hours and SWB-maximizing hours. We show that about three-quarters of individuals make decisions that are not inconsistent with maximizing their SWB. We discuss the potential channels that explain the lack of optimization when deviations are significantly large. We find proxies for a number of individual and external constraints, and show that constraints alone can explain at least half of the deviations. In our context, deviations partly reflect the inability of the revealed preference approach to account for labor market rigidities, so the actual and SWBmaximizing hours should be used in a complementary manner. The suggested approach based on our deviation metric could help identify labor market frictions.
    Keywords: Decision Utility, Experienced Utility, Labor Supply, Subjective Well-Being
    Date: 2022–12–09
  10. By: Alessandro Prosperi
    Abstract: The existence of a (partial) market equilibrium price is proved in a complete, continuous time finite-agent market setting. The economic agents act as price takers in a fully competitive setting and maximize exponential utility from terminal wealth. As the number $N$ of economic agents goes to infinity, the BSDE system of $N$ equations characterizing the equilibrium asset price dynamics decouples. Due to the system's symmetry, the influence of the mean field of the agents, conditionally on the common noise, becomes deterministic.
    Date: 2022–11
  11. By: Reona Hayashi; So Morikawa; Takeshi Ojima; Manami Tsuruta
    Abstract: While risk preference is one of the cornerstones of bureaucratic behavior theories, there is no consensus on its meaning and conceptualization. Only a few studies have incorporated different concepts into the investigation of the differences between the public and private sectors in risk preference and the association between public service motivation (PSM) and risk preference. Using self-reported and behavioral measures for risk preference, we analyzed the risk aversion of public employees and those with high PSM. The behavioral measures were a multiple price list and lottery choice tasks for higher-order risk preferences (prudence and temperance). A general self-reported measure revealed that public employees were risk-averse, whereas behavioral measures showed that public employees were not risk-averse with the multiple price list but more temperate. Those with high PSM were risk-averse using prudence and temperance measures, while they tended to be risk-taking in self-reports. The opposite results in PSM are partially due to the different sub-dimensions of PSM, yielding risk aversion for those with high commitment to public values and risk-taking for those with high self-sacrifice.
    Date: 2022–10
  12. By: Riehm, Tobias
    Abstract: In auctions bidders are usually assumed to have rational expectations with regards to their winning probability. However, experimental and empirical evidence suggests that agent's expectations depend on direct utility stemming from expectations, resulting in optimism or pessimism. Optimism increases ex ante savoring, while pessimism leads to less disappointment ex post. Hence, optimal expectations depend on the time left until the uncertainty is resolved, i.e. the time one can savor ex ante by being (too) optimistic. Applying the decision theory model of Gollier and Muermann (2010) to first price auctions, I show that by decreasing the time between bids and revelation of results, the auctioneer can induce bidders to forego optimism, leading to more aggressive bids and thereby higher revenues for the auctioneer. Finally I test these predictions experimentally, finding no evidence for my theoretical predictions.
    Keywords: Auctions,Experiment,Motivated Beliefs
    JEL: D44 C91
    Date: 2022
  13. By: Bach Dong Xuan (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Philippe Bich (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Wigniolle (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, PJSE - Paris Jourdan Sciences Economiques - 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)
    Abstract: In this paper, we give axiomatic foundations for a social planner objective function that takes the form of the maxmin of quasi-hyperbolic criteria. The minimum is taken over a set Q of possible pairs of discount rates δ and present bias parameters p0. When there is no present bias, we recover Chambers and Echenique's axiomatization of maxmin exponential preferences, and when Q reduces to a singleton, we get Montiel Olea and Strzalecki's axiomatization of quasi-hyperbolic preferences. To prove our main result, we provide some intertemporal variational representation results of interest for its own sake.
    Keywords: Discounting, Discount rate, Exponential model, Hyperbolic model, Maxmin expected utility discounting, Maxmin expected utility
    Date: 2022–12
  14. By: Dohmen, Thomas (University of Bonn and IZA); Quercia, Simone (University of Verona); Willrodt, Jana (Düsseldorf Institute for Competition Economics (DICE))
    Abstract: In this paper, we provide an explanation for why risk taking is related to optimism. Using a laboratory experiment, we show that the degree of optimism predicts whether people tend to focus on the positive or negative outcomes of risky decisions. While optimists tend to focus on the good outcomes, pessimists focus on the bad outcomes of risk. The tendency to focus on good or bad outcomes of risk in turn affects both the self-reported willingness to take risk and actual risktaking behavior. This suggests that dispositional optimism may affect risk taking mainly by shifting attention to specific outcomes rather than causing misperception of probabilities. In line with this, in a second study we find evidence that dispositional optimism is related to elicited parameters of rank dependent utility theory suggesting that focusing may be among the psychological determinants of decision weights. Finally, we corroborate our findings with process data related to focusing showing that optimists tend to remember more and attend more to good outcomes and this in turn affects their risk taking.
    Keywords: risk taking behavior, optimism, preference measure
    JEL: D91 C91 D81 D01
    Date: 2022–11
  15. By: Böhm, Volker (Center for Mathematical Economics, Bielefeld University)
    Abstract: This note presents an analytical method to examine when, why, and how rules of price nor- malization have an impact on noncompetitive equilibria in Arrow-Debreu economies. For simple prototype economies it is shown that under smooth strict convexity of preferences and technologies regular monopolistic equilibria depend generically on the parameters of the nor- malization map. Conversely, for an example with consumer preferences from a parametrized class of quasi-concave/quasi-convex utility functions monopolistic equilibria are shown to be invariant under normalization for all parameters under convex technologies as well as under fixed costs or increasing returns. The generic dependence of allocations on rules of price normalization implies alterations of characteristics of outcomes in a much wider class of applications than models of monopolis- tic competition only. Several examples of so-called Cournot-Walras oligopolies are discussed occurring in typical models with monopolistic competition, international trade, welfare eco- nomics, public economics, and macroeconomics revealing the generic impact of price normal- ization on noncompetitive outcomes in Arrow-Debreu economies.
    Date: 2022–12–23
  16. By: Michael Falkenheim
    Abstract: Government debt affects people’s welfare through two distinct channels: It crowds out capital, and it shifts risk from current to future generations. This study extends Olivier Blanchard’s 2019 analysis of the welfare effects of debt by decomposing his estimates into those two categories. Blanchard estimated the change in average utility under simulations of an overlapping generations model with and without a transfer of wealth from the younger to the older generation. This study decomposes those estimated welfare effects into crowding-out and risk- shifting components and
    JEL: E22 E23 E43 E62 H50 H63
    Date: 2022–12–16
  17. By: Brett Hemenway Falk; Gerry Tsoukalas; Niuniu Zhang
    Abstract: Non-Fungible Tokens (NFTs) promise to revolutionize how content creators (e.g., artists) price and sell their work. One core feature of NFTs is the option to embed creator royalties which earmark a percentage of future sale proceeds to creators, each time their NFTs change hands. As popular as this feature is in practice, its utility is often questioned because buyers, the argument goes, simply ``price it in at the time of purchase''. As intuitive as this argument sounds, it is incomplete. We find royalties can add value to creators in at least three distinct ways. (i) Risk sharing: when creators and buyers are risk sensitive, royalties can improve trade by splitting the risks associated with future price volatility; (ii) Dynamic pricing: in the presence of information asymmetry, royalties can extract more revenues from better-informed speculators over time, mimicking the benefits of ``dynamic pricing''; (iii) Price discrimination: when creators sell multi-unit NFT collections, royalties can better capture value from heterogeneous buyers. Our results suggest creator royalties play an important and sometimes overlooked role in the economics of NFTs.
    Date: 2022–12
  18. By: Bence Mero (Magyar Nemzeti Bank (Central Bank of Hungary)); Andras Borsos (Magyar Nemzeti Bank (Central Bank of Hungary)); Zsuzsanna Hosszu (Magyar Nemzeti Bank (Central Bank of Hungary)); Zsolt Olah (Magyar Nemzeti Bank (Central Bank of Hungary)); Nikolett Vago (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper presents a complex, modular, 1:1 scale model of the Hungarian residential housing market. All the 4 million households and their relevant characteristics are represented based on empirical micro-level data coming from the Central Credit Information System, the Pension Payment database and transaction data of property sales collected by the National Tax and Customs Administration and the largest real estate agencies. The model features transactions in the housing and rental markets, a construction sector, buy-to-let investors, housing loans, house price dynamics and a procyclical banking sector regulated by a macroprudential authority. The flats in the model are characterized with detailed attributes regarding their size, state and neighbourhood quality. Households choose the flat with the highest consumer surplus according to standard utility maximization theory. Additionally, we have also implemented demographic trends, including childbearing, marriage and inheritance. This way the model is suitable for analysing various types of macroprudential, fiscal and monetary policies as well as for the assessment of exogenous shock scenarios. Initiating the model simulation from 2018, it managed to reproduce the number of transactions and the observed house price dynamics in most of the regions of Hungary for 2018-2019, while the volume of new housing loans and their distribution regarding income deciles and loan-to-value ratios were also in compliance with the empirical data.
    Keywords: agent-based modelling, macroprudential policy, housing market, housing loans
    JEL: C63 D1 D31 E58 R21 R31
    Date: 2022

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.