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on Utility Models and Prospect Theory |
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Issue of 2023‒02‒06
ten papers chosen by |
| By: | Jeanne Hagenbach (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Frédéric Koessler (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: | We consider a single psychological agent whose utility depends on his action, the state of the world, and the belief he holds about that state. The agent is initially informed about the state and decides whether to memorize it, otherwise he has no recall. We model the memorization process by a multi-self game in which the privately-informed first self voluntarily discloses information to the second self, who has identical preferences and acts upon the disclosed information. We show that, for broad categories of psychological utility functions, there exists an equilibrium in which every state is voluntarily memorized. In contrast, if there are exogenous failures in the memorization process, the agent always memorizes states selectively. In this case, we characterize the partially informative equilibria for common classes of psychological utilities. |
| Keywords: | Multi-self games, Disclosure games, Imperfect recall, Selective memory, Motivated beliefs, Psychological games, Anticipatory utility |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:spmain:halshs-03672216&r=upt |
| By: | Junnan He (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The classical rational choice theory proposes that preferences are context-independent, e.g. independent of irrelevant alternatives. Empirical choice data, however, display several contextual choice effects that seem inconsistent with rational preferences. We study a choice model with a fixed underlying utility function and explain contextual choices with a novel information friction: the agent's perception of the options is affected by an attribute-specific noise. Under this friction, the agent learns useful information when she sees more options. Therefore, the agent chooses contextually, exhibiting intransitivity, joint-separate evaluation reversal, attraction effect, compromise effect, similarity effect, and phantom decoy effect. Nonetheless, because the noise is attribute-specific and common across alternatives, the agent's choice is perfectly rational whenever an option clearly dominates others. |
| Keywords: | Compromise effect, Context effect, Imperfect perception, Intransitive choices, Joint-separate evaluation reversal, Phantom decoy effect, Stable preferences. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:spmain:hal-03878378&r=upt |
| By: | Jonathan Chapman; Mark Dean; Pietro Ortoleva; Erik Snowberg; Colin Camerer |
| Abstract: | We use four incentivized representative surveys to study the endowment effect for lotteries in 4, 000 U.S. adults. We replicate the standard finding of an endowment effect—the divergence between Willingness to Accept (WTA) and Willingness to Pay (WTP), but document three new findings. First, we find little evidence that the endowment effect is related to loss aversion for risky prospects, counter to predictions of popular theories in economics. Second, WTA and WTP not only diverge, but are, at best, weakly correlated. Third, WTA and WTP strongly relate to other aspects of risk preferences. The structure of these behaviors points to different theories of the endowment effect. |
| JEL: | C90 D81 D91 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30836&r=upt |
| By: | Jose Cobian; Budy P. Resosudarmo; Alin Halimatussadiah; Susan Olivia |
| Abstract: | Most megacities in developing countries are constantly exposed to flood risk, with a clear lack of understanding of insurance leading to poor risk management by urban populations. This paper analyses the demand for a hypothetical index-based flood insurance product among households in Jakarta, Indonesia. An expected utility framework is used to test whether this demand is significantly determined by the basis risk component of the insurance. The paper investigates the effects on insurance uptake of premium discounts, and risk aversion. Using distance of a house to the reference floodgate station (a proxy for basis risk), we find demand falls as basis risk increases. Additionally, the uptake decreases with price and risk aversion. We recommend further investment in floodgate stations to reduce basis risk, complemented with subsidies to encourage demand for this product. However, the level of discount offered to urban households is inconclusive and constitutes an important topic for future research. |
| Keywords: | index insurance, basis risk, disasters, floods, Indonesia |
| JEL: | D81 G22 Q54 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2022-12&r=upt |
| By: | Tonna Emenuga |
| Abstract: | The standard rational choice model describes individuals as making choices by selecting the best option from a menu. A wealth of evidence instead suggests that individuals often filter menus into smaller sets - consideration sets - from which choices are then made. I provide a theoretical foundation for this phenomenon, developing a formal language of axioms to characterize how consideration sets are formed from menus. I posit that consideration filters - mappings that translate a menu into one of its subsets - capture this process, and I introduce several properties that consideration filters can have. I then extend this core model to provide linkages with the sequential choice and rational attention literatures. Finally, I explore whether utility representation is feasible under this consideration model, conjecturing necessary and sufficient conditions for consideration-mediated choices to be rationalizable. |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2301.05649&r=upt |
| By: | Zahra, Urmila Az; wildana, Ratmi |
| Abstract: | Dalam ilmu ekonomi, produksi dapat diartikan sebagai kegiatan yang menciptakan manfaat (utility) baik di masa kini maupun di masa yang akan datang. Pembahasan tentang produksi dalam ilmu ekonomi konvensional hanya mengusung maksimalisasi keuntungan sebagai motif utama. Padahal masih banyak lagi motif yang lain dari hanya sekedar meningkatkan keuntungan. Meskipun pada dasarnya Islam tidak melarang motif semacam memaksimalkan keuntungan duniawi semata. Namun, Islam lebih mengutamakan keikhlasan dan balasan di akhirat kelak. |
| Date: | 2022–12–25 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:kzywc&r=upt |
| By: | Xiaoliang Li; Bo Li |
| Abstract: | In this paper, we explore a dynamic Bertrand duopoly game with differentiated products, where firms are boundedly rational and consumers are assumed to possess an underlying CES utility function. We mainly focus on two distinct degrees of product substitutability. Several tools based on symbolic computations such as the triangular decomposition method and the PCAD method are employed in the analytical investigation of the model. The uniqueness of the non-vanishing equilibrium is proved and rigorous conditions for the local stability of this equilibrium are established for the first time. Most importantly, we find that increasing the substitutability degree or decreasing the product differentiation has an effect of destabilization for our Bertrand model, which is in contrast with the relative conclusions for the Cournot models. This finding could be conducive to the revelation of the essential difference between dynamic Cournot and Bertrand oligopolies with differentiated goods. In the special case of identical marginal costs, we derive that lower degrees of product differentiation mean lower prices, higher supplies, lower profits, and lower social welfare. Furthermore, complex dynamics such as periodic orbits and chaos are reported through our numerical simulations. |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2301.01007&r=upt |
| By: | Buehler, Stefan; Chen, Rachel; Halbheer, Daniel |
| Abstract: | This paper develops an analytical framework to study how firms should design a product by choosing its recyclability and price when consumers adopt a life-cycle approach and decide whether to recycle an end-of-life product. We show that, under a linear business model, the firm offers a non-recyclable product even if consumers care about recyclability. Under a circular business model, the firm generates revenue from both sales and recycling, and determines recyclability by balancing the marginal changes in the consumers’ expected end-of-life utility and the unit production cost net of the expected value of the recovered resources. We identify conditions under which the firm offers a fully recyclable product and all consumers return the product for recycling. In addition, we show that stronger consumer concerns about recyclability and a higher market value of the recovered resources increase recyclability, but have an ambiguous impact on price, demand, profit, and the waste footprint of the firm. Further, we characterize conditions under which transitioning from a linear to a circular business model is profitable and socially desirable. Finally, we examine how the firm can boost circularity by leveraging deposit-refund systems, product buyback, or retaining product ownership. |
| Keywords: | Circular business model, waste footprint, resource footprint, recycling, reverse supply chain, pricing |
| JEL: | D21 L21 M21 M31 Q53 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2023:02&r=upt |
| By: | Stéphane Gauthier (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, IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies); Guy Laroque (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies) |
| Abstract: | This paper assesses the usefulness of stochastic contracts in the presence of informational asymmetries. It identifies circumstances where a stochastic redistribution policy is socially dominated by the deterministic policy where after-tax income lotteries are replaced with their certainty equivalent. It also provides a parametric example where every stochastic menu which has the optimal deterministic menu as certainty equivalent is dominated by the deterministic menu, while there exist feasible and incentive compatible lotteries improving locally upon the deterministic menu. |
| Keywords: | Asymmetric information, Random contracts, Certainty equivalent |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:spmain:halshs-03359574&r=upt |
| By: | Alex Rees-Jones; Ao Wang |
| Abstract: | We present a general approach to experimentally testing candidate reference points. This approach builds from Prospect Theory’s prediction that an increase in payoffs is perfectly offset by an equivalent increase in the reference point. Violation of this prediction can be tested with modifications to existing econometric techniques in experiments of a particular design. The resulting approach to testing theories of the reference point is minimally parametric, robust to broad classes of heterogeneity, yet still implementable in comparatively small sample sizes. We demonstrate the application of this approach in an experiment that tests the role of salience in setting reference points. |
| JEL: | C14 D9 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30773&r=upt |