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on Utility Models and Prospect Theory |
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Issue of 2023‒03‒13
thirteen papers chosen by |
| By: | Mohammed Abdellaoui (HEC Paris - Ecole des Hautes Etudes Commerciales, GREGHEC - Groupement de Recherche et d'Etudes en Gestion - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique); Horst Zank (University of Manchester [Manchester]) |
| Abstract: | Foundations are provided for rank-dependent preferences within the popular twostage framework of Anscombe-Aumann, in which risk and ambiguity feature as distinct sources of uncertainty. We advance the study of attitudes towards ambiguity without imposing expected utility for risk. As a result, in our general model, ambiguity attitude can be captured by non-additive subjective probabilities as under Choquet expected utility or by a specific utility for ambiguity as in recursive expected utility or, if required, by both. The key property for preferences builds on (discrete) rates of substitution which are standardly applied in economics. By demanding consistency for these rates of substitution across events and within or across sources of uncertainty, we obtain a model that nests popular theories for risk and ambiguity. This way, new possibilities for theoretical and empirical analyses of these theories emerge. |
| Keywords: | Ambiguity, Recursive Expected Utility, Risk, Substitution Consistency, Source-dependence, Source and Rank-dependent Utility |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03924295&r=upt |
| By: | Nail Kashaev; Charles Gauthier; Victor H. Aguiar |
| Abstract: | We analyze consumer demand behavior using Dynamic Random Utility Model (DRUM). Under DRUM, a consumer draws a utility function from a stochastic utility process in each period and maximizes this utility subject to her budget constraint. DRUM allows unrestricted time correlation and cross-section heterogeneity in preferences. We fully characterize DRUM for a panel data of consumer choices and budgets. DRUM is linked to a finite mixture of deterministic behavior represented as the Kronecker product of static rationalizable behavior. We provide a generalization of the Weyl-Minkowski theorem that uses this link and enables conversion of the characterizations of the static Random Utility Model (RUM) of McFadden-Richter (1990) to its dynamic form. DRUM is more flexible than Afriat's (1967) framework for time series and more informative than RUM. We show the feasibility of the statistical test of DRUM in a Monte Carlo study. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.04417&r=upt |
| By: | Haruki Kono; Kota Saito; Alec Sandroni |
| Abstract: | The random utility model is one of the most fundamental models in discrete choice analysis in economics. Although Falmagne (1978) obtained an axiomatization of the random utility model, his characterization requires strong observability of choices, i.e., that the frequency of choices must be observed from all subsets of the set of alternatives. Little is known, however, about the axiomatization when a dataset is incomplete, i.e., the frequencies on some choice sets are not observable. In fact, it is known that in some cases, obtaining a tight characterization is NP hard. On the other hand, datasets in reality almost always violate the requirements on observability assumed by Falmagne (1978). We consider an incomplete dataset in which we do not observe frequencies of some alternatives: for all other alternatives, we observe frequencies. For such a dataset, we obtain a finite system of linear inequalities that is necessary and sufficient for the dataset to be rationalized by a random utility model. Moreover, the necessary and sufficient condition is tight in the sense that none of the inequalities is implied by the other inequalities, and dropping any one of the inequalities makes the condition not sufficient. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.03913&r=upt |
| By: | Yiling Chen; Tao Lin |
| Abstract: | The classic Bayesian persuasion model assumes a Bayesian and best-responding receiver. We study a relaxation of the Bayesian persuasion model where the receiver can approximately best respond to the sender's signaling scheme. We show that, under natural assumptions, (1) the sender can find a signaling scheme that guarantees itself an expected utility almost as good as its optimal utility in the classic model, no matter what approximately best-responding strategy the receiver uses; (2) on the other hand, there is no signaling scheme that gives the sender much more utility than its optimal utility in the classic model, even if the receiver uses the approximately best-responding strategy that is best for the sender. Together, (1) and (2) imply that the approximately best-responding behavior of the receiver does not affect the sender's maximal achievable utility a lot in the Bayesian persuasion problem. The proofs of both results rely on the idea of robustification of a Bayesian persuasion scheme: given a pair of the sender's signaling scheme and the receiver's strategy, we can construct another signaling scheme such that the receiver prefers to use that strategy in the new scheme more than in the original scheme, and the two schemes give the sender similar utilities. As an application of our main result (1), we show that, in a repeated Bayesian persuasion model where the receiver learns to respond to the sender by some algorithms, the sender can do almost as well as in the classic model. Interestingly, unlike (2), with a learning receiver the sender can sometimes do much better than in the classic model. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.03719&r=upt |
| By: | Itai Arieli; Ronen Gradwohl; Rann Smorodinsky |
| Abstract: | We study the robustness of cheap-talk equilibria to infinitesimal private information of the receiver in a model with a binary state-space and state-independent sender-preferences. We show that the sender-optimal equilibrium is robust if and only if this equilibrium either reveals no information to the receiver or fully reveals one of the states with positive probability. We then characterize the actions that can be played with positive probability in any robust equilibrium. Finally, we fully characterize the optimal sender-utility under binary receiver's private information, and provide bounds for the optimal sender-utility under general private information. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.00281&r=upt |
| By: | Theo Diamandis; Max Resnick; Tarun Chitra; Guillermo Angeris |
| Abstract: | Constant function market makers (CFMMs) such as Uniswap have facilitated trillions of dollars of digital asset trades and have billions of dollars of liquidity. One natural question is how to optimally route trades across a network of CFMMs in order to ensure the largest possible utility (as specified by a user). We present an efficient algorithm, based on a decomposition method, to solve the problem of optimally executing an order across a network of decentralized exchanges. The decomposition method, as a side effect, makes it simple to incorporate more complicated CFMMs, or even include 'aggregate CFMMs' (such as Uniswap v3), into the routing problem. Numerical results show significant performance improvements of this method, tested on realistic networks of CFMMs, when compared against an off-the-shelf commercial solver. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.04938&r=upt |
| By: | King King Li (Shenzhen Audenica Financial Technology Institute); Ying-Yi Hong (Chinese University of Hong Kong - Partenaires INRAE); Bo Huang (Chinese University of Hong Kong - Partenaires INRAE); Tony Tam (Chinese University of Hong Kong - Partenaires INRAE) |
| Abstract: | This study compares Chinese people's trust and trustworthiness, risk attitude, and time preference before and after the onset of the COVID-19 pandemic in China. We compare the preferences of subjects in two online experiments with samples drawn from 31 provinces across mainland China before and after the onset of the pandemic. We test two competing hypotheses regarding trust and trustworthiness. On the one hand, the outbreak as a collective threat could enhance in-group cohesion and cooperation and thus increase trust and trustworthiness. On the other hand, to the extent that people expect their future income to decline, they may become more self-protective and self-controlled, and thus less trusting and trustworthy and more risk averse and patient. Comparing before and after the onset, we found that the subjects increased in trustworthiness. After the onset, trust and trustworthiness (and risk aversion and present bias too) were positively correlated with the COVID-19 prevalence rate in the provinces. Subjects with more pessimistic expectations about income change showed more risk aversion and lower discount rates, supporting the speculation concerning self-control. |
| Keywords: | COVID-19, trust, trustworthiness, social preference, risk attitude |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03899653&r=upt |
| By: | Mintewab Bezabih (Environment and Climate Research Center, Policy Studies Institut); Finn Tarp (University of Copenhagen); Hailemariam Teklewold (Environment and Climate Research Center, Policy Studies Institute); Alemu Mekonnen (Department of Economics, Addis Ababa University); Tagel G/Hiwot (Environment and Climate Research Center, Policy Studies Institute) |
| Abstract: | This paper presents an empirical analysis of how the choice of seed technology impacts farm productivity and management in a setting characterized by high risks. The findings reveal that risk aversion and climate are important driving forces for crop technology choice. Risk averse farmers can hedge against the risks they face by skewing their choices towards traditional varieties. A comparison of the relative importance of traditional versus improved varieties shows that the latter lead to gains in crop income. We also found notable differences from adopting a singular versus a combination of the varieties, with the combination having lower impact on income, compared to improved-varieties-only and higher income compared to traditional-varieties only. The exact opposite holds for the impact of alternative varieties on the cost of risk. The implication is that the risk prone nature of Ethiopian agriculture leads to marked tradeoffs in terms of productivity and risk between the two sets of varieties. |
| Keywords: | traditional and improved varieties, crop revenue, risk premium, multinomial switching regression, Ethiopia |
| JEL: | Q16 Q57 C22 |
| Date: | 2023–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuderg:2321&r=upt |
| By: | Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis |
| Abstract: | This paper analyzes the root cause of Ellsberg-type choices. This class of problems shares the feature that at the time of the decision, t=m, the decision maker (DM) possesses partial information about the events/propositions of interest: DM knows the objective probabilities of some sub-class only, whereas she is uninformed about the probabilities of the complement of this subclass. As a result, DM may slip into the state of 'comparative ignorance' (see Heath and Tversky 1991 and Fox and Tversky 1995). Under this state, DM is likely to exhibit 'ambiguity aversion' (AA) for the events for which she does not have any information relative to those for which she does. AA, in turn, results in DM having non-coherent beliefs, that is, her prior probability function is not additive. A possible way to mitigate AA is to motivate DM to form her prior in a state of 'uniform ignorance'. This may be accomplished by inviting DM to bring herself to the hypothetical time t=0, in the context of which the information was still a contingency, and trace her "counterfactual prior back then". Under uniform ignorance, DM may adhere to the 'Principle of Indifference', thus identifying the prior counterfactual probability with the uniform distribution. Once this probability is elicited, DM can embody the existing information into her current, actual set of beliefs by means of Bayesian Conditionalization. In this case, we show that this set of beliefs is additive. |
| Keywords: | counterfactual priors, ambiguity, ellsberg paradox |
| JEL: | C44 D81 D83 D89 |
| Date: | 2023–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:2307&r=upt |
| By: | Zechmeister-Koss, Ingrid; Strohmaier, Christoph; Hölzle, Laura; Bauer, Annette; Goodyear, Melinda; Christiansen, Hanna; Paul, Jean L. |
| Abstract: | Objectives: The nature of adverse effects of parental mental health problems and of the interventions to address them may require specific designs of economic evaluation studies. Nevertheless, methodological guidance is lacking. We aim to understand the broad spectrum of adverse effects from parental mental health problems in children and the economic consequences on an individual and societal level to navigate the design of economic evaluations in this field. Methods: We conducted a systematic literature search of empirical studies on children's adverse effects from parental mental illness. We clustered types of impact, identified individual and public cost consequences, and illustrated the results in an impact inventory. Results: We found a wide variety of short- and long-term (mental) health impacts, impacts on social functioning and socioeconomic implications for the children individually, and adverse effects on the societal level. Consequently, public costs can occur in various public sectors (eg, healthcare, education), and individuals may have to pay costs privately. Conclusions: Existing evaluations in this field mostly follow standard methodological approaches (eg, cost-utility analysis using quality-adjusted life-years) and apply a short-time horizon. Our findings suggest applying a long-term time horizon (at least up to early adulthood), considering cost-consequence analysis and alternatives to health-related quality of life and quality-adjusted life-years as outcome measures, and capturing the full range of possible public and private costs. |
| Keywords: | child outcome measures; economic evaluation; parental mental illness |
| JEL: | J1 |
| Date: | 2022–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118064&r=upt |
| By: | Suzannah Chapman; Anna Szklanowska; Ruth Lopert |
| Abstract: | Ensuring affordable access to novel medicines has been identified as a policy priority among OECD and EU countries, yet systematic monitoring of the various dimensions of access is lacking. Previous efforts to measure access have focused primarily on one or at most two of these dimensions, such as availability and affordability, but a more holistic picture is needed. The OECD undertook a pilot study in EU Member States that aimed to determine the utility and feasibility of routine, cross-national monitoring of access to medicines across multiple dimensions. The work included a desk review to define the dimensions of access and associated indicators, followed by an OECD survey to explore the feasibility of collecting and analysing the relevant data for a convenience sample of 15 recently authorised product/indication pairs. This working paper presents key learnings from the desk review and country survey to which 21 EU Member States responded, with a focus on exploring the utility and feasibility of the processes of monitoring and measurement. |
| Keywords: | acceptability, access, accessibility, affordability, availability, novel medicines |
| JEL: | I10 I11 I18 |
| Date: | 2023–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaad:151-en&r=upt |
| By: | Cordoba, Juan Carlos |
| Abstract: | An influential body of literature has challenged the suitability of utilitarianism as a criterion for population ethics. Parfit's (1984) Repugnant Conclusion posits that utilitarianism favors the existence of large, impoverished societies. Dasgupta's (2005, 2019) calibrated models provide support for this conclusion. However, this paper demonstrates that these findings can be overturned by considering alternative, plausible assumptions. For instance, a wealthy society with a small population can be consistent with utilitarianism. The paper argues that utilitarianism offers a reliable benchmark for population ethics. |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202302241652330000&r=upt |
| By: | Radosveta Ivanova-Stenzel (TU Berlin); Sabine Kröger (Laval University, Quebec) |
| Abstract: | In Buy-It-Now auctions, sellers can post a take-it-or-leave-it price offer prior to an auction. While the literature almost exclusively looks at buyers in such combined mechanisms, the current paper summarizes results from the sellers' point of view. Buy-It-Now auctions are complex mechanisms and therefore quite challenging for sellers. The paper discusses the seller's curse, a bias that sellers might fall prey to in such combined mechanisms, and how experience counterbalances this bias. Furthermore, the paper explores the role of information and bargaining power on behavior and profit prospects in Buy-It-Now auctions. |
| Keywords: | asymmetric information; laboratory experiment; field experiment; auction; BIN-auction; Buy-It-Now auction; BIN-price; Buy-It-Now price; combined mechanism; |
| JEL: | C72 C91 D44 D82 L1 |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:382&r=upt |