
on Utility Models and Prospect Theory 
By:  Christopher Turansick 
Abstract:  We study the repeated choice interpretation of stochastic choice and the individual interpretation of the random utility model. We consider a myopic agent whose distribution over preferences tomorrow potentially depends on their consumption and preference today. Even when the agent is classically rational in each of their static decisions, there are forms of consumption dependence which are inconsistent with random utility as a model of intertemporal aggregation. We offer two characterizations of Markovian consumption dependence which are consistent with random utility. Further, we characterize the behavioral content of consumption dependence in a two period stochastic choice model. 
Date:  2023–02 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2302.05806&r=upt 
By:  Valdes Salvador; Gonzalo ValdesEdwards 
Abstract:  This paper builds a rule for decisionmaking from the physical behavior of single neurons, the well established neural circuitry of mutual inhibition, and the evolutionary principle of natural selection. No axioms are used in the derivation of this rule. The paper provides a microfoundation to both Economics Choice Theory and Cognitive Psychologys Response Times Theory. The paper finds how classical expected utility should be modified to account for much neuroscientific evidence, and how neuroscientific correlates of choice should be linked to utility. In particular, the model implies the concept of utility is a network property and cannot be calculated as a function of frequencies in one layer of neurons alone; it requires understanding how different layers work together. The resulting rule is simple enough to model markets and games as is customary in the social sciences. Utility maximization and inaction are endogenous to the model, cardinality and independence of irrelevant alternatives, properties present in classical and random utility theories, are only met in limiting situations. 
Date:  2023–02 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2302.09421&r=upt 
By:  Marina Santacroce; Paola Siri; Barbara Trivellato 
Abstract:  We consider the classical problem of maximizing the expected utility of terminal net wealth with a final random liability in a simple jumpdiffusion model. In the spirit of Horst et al. (2014) and SantacroceTrivellato (2014), under suitable conditions the optimal strategy is expressed in implicit form in terms of a forward backward system of equations. Some explicit results are presented for the pure jump model and for exponential utilities. 
Date:  2023–02 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2302.08253&r=upt 
By:  Chen Sun (HU Berlin) 
Abstract:  Growing evidence indicates that utility over time is different from utility under risk. Hence, measuring intertemporal preferences (discounting and utility) exclusively from intertemporal choices is desirable. We develop a simple method for measuring intertemporal preferences. It is parameterfree in both discounting and utility, and allows a wider range of models to be measured than preceding methods. It is easy to implement, clear to subjects, incentive compatible, and does not require more measurements than existing methods if identical assumptions are imposed. In an experiment, we illustrate how the method can be used to test recent models with unconventional assumptions nonparametrically. 
Keywords:  measuring time preferences; intertemporal profile; parameterfree; 
JEL:  C91 D12 D91 
Date:  2023–02–13 
URL:  http://d.repec.org/n?u=RePEc:rco:dpaper:386&r=upt 
By:  Anis Matoussi (LMM  Laboratoire Manceau de Mathématiques  UM  Le Mans Université); Mohamed Mrad (LAGA  Laboratoire Analyse, Géométrie et Applications  UP8  Université Paris 8 VincennesSaintDenis  UP13  Université Paris 13  Institut Galilée  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  This work concerns the study of consistent dynamic utilities in a financial market with jumps. We extend the results established in the paper [EKM13] to this framework. The ideas are similar but the difficulties are different due to the presence of the Lévy process. An additional complexity is clearly the interpretation of the terms of jumps in the different problems primal and dual one and relate them to each other. To do, we need an extension of the ItôVentzel's formula to jump's frame. By verification, we show that the dynamic utility is solution of a nonlinear second order stochastic partial integrodifferential equation (SPIDE). The main difficulty is that this SPIDE is forward in time, so there are no results in the literature that ensure the existence of a solution or simply allow us to deduce important properties, in our study, such as concavity or monotonicity. Our approach is based on a complete study of the primal and the dual problems. This allows us, firstly, to establish a connection between the utilitySPIDE and two SDEs satisfied by the optimal processes. Based on this connection and the SDE's theory, stochastic flow technics and characteristic method allow us, secondly, to completely solve the equation; existence, uniqueness, monotony and concavity. * This research benefited from the support of the "Chair Risques Émergents ou atypiques en Assurance", under the aegis of Fondation du Risque, a joint initiative by Le Mans Université, École polytechnique and l'Entreprise MMA and the support of the "Labex MMEDII". 
Keywords:  forward utility, stochastic PDE with jumps, Stochastic flows, stochastic characteristics method, performance criteria, horizonunbiased utility, consistent utility, progressive utility, portfolio optimization, duality 
Date:  2022–02–28 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal03025475&r=upt 
By:  Brice Corgnet (Univ Lyon, Emlyon Business School, GATE UMR 5824, F69130 Ecully, France); Roberto HernanGonzalez (Burgundy School of Business, Dijon, France); Yao Thibaut Kpegli (Univ Lyon, Université Lyon 2, GATE UMR 5824, F69130 Ecully, France); Adam Zylbersztejn (Univ Lyon, Université Lyon 2, GATE UMR 5824, F69130 Ecully, France; research fellow at Vistula University Warsaw (AFiBV), Warsaw, Poland) 
Abstract:  The riskincentives tradeoff (RIT) is a fundamental result of principalagent theory. Yet, empirical evidence has been elusive. This could be due to a lack of robustness of the theory outside of the standard expected utility framework (EUT) or to confounding factors in the empirical tests. First, we theoretically study the existence of RIT under alternative theories: RankDependent Utility (RDU) and MeanVarianceSkewness (MVS). We show that RIT is remarkably robust under RDU, but not under MVS. Second, we use a novel experimental design that eliminates confounding factors and find evidence for RIT even in the case of riskseeking agents, which is a distinct prediction of RDU. Our results provide support for the riskincentives tradeoff and suggest that it applies to a broad range of situations including cases in which agents are riskseeking (e.g., executive compensation). 
Keywords:  RiskIncentives Tradeoff, RankDependent Utility, MeanVarianceSkewness, Experiments 
JEL:  C92 D23 D86 M54 
Date:  2023 
URL:  http://d.repec.org/n?u=RePEc:gat:wpaper:2305&r=upt 
By:  Camilo Hern\'andez; Dylan Possama\"i 
Abstract:  This paper investigates the moral hazard problem in finite horizon with both continuous and lumpsum payments, involving a timeinconsistent sophisticated agent and a standard utility maximiser principal. Building upon the socalled dynamic programming approach in Cvitani\'c, Possama\"i, and Touzi [18] and the recently available results in Hern\'andez and Possama\"i [43], we present a methodology that covers the previous contracting problem. Our main contribution consists in a characterisation of the moral hazard problem faced by the principal. In particular, it shows that under relatively mild technical conditions on the data of the problem, the supremum of the principal's expected utility over a smaller restricted family of contracts is equal to the supremum over all feasible contracts. Nevertheless, this characterisation yields, as far as we know, a novel class of control problems that involve the control of a forward Volterra equation via Volterratype controls, and infinitedimensional stochastic target constraints. Despite the inherent challenges associated to such a problem, we study the solution under three different specifications of utility functions for both the agent and the principal, and draw qualitative implications from the form of the optimal contract. The general case remains the subject of future research. 
Date:  2023–03 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2303.01601&r=upt 
By:  Mohamed Mrad (LAGA  Laboratoire Analyse, Géométrie et Applications  UP8  Université Paris 8 VincennesSaintDenis  UP13  Université Paris 13  Institut Galilée  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  The method of characteristics is a powerful tool to solve some nonlinear second order stochastic PDEs like those satisfied by a consistent dynamic utilities, see [EM13, MM20]. In this situation the solution V (t, z) is theoretically of the formX t V (0, ξ t (z)) whereX and Y are solutions of a system of two SDEs, ξ is the inverse flow ofȲ and V (0, .) is the initial condition. Unfortunately this representation is not explicit except in simple cases whereX andȲ are solutions of linear equations. The objective of this work is to take advantage of this representation to establish a numerical scheme approximating the solution V using Euler approximations X N and ξ N of X and ξ. This allows us to avoid a complicated discretizations in time and space of the SPDE for which it seems really difficult to obtain error estimates. We place ourselves in the framework of SDEs driven by Lévy noise and we establish at first a strong convergence result, in L pnorms, of the compound approximation X N t (Y N t (z)) to the compound variable X t (Y t (z)), in terms of the approximations of X and Y which are solutions of two SDEs with jumps. We then apply this result to UtilitySPDEs of HJB type after inverting monotonic stochastic flows. 
Keywords:  Euler scheme, stochastic flow, method of stochastic characteristics, SPDE driven by Lévy noise, UtilitySPDE, GarsiaRodemichRumsey lemma, strong approximation 
Date:  2022–02–01 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal03211171&r=upt 
By:  Peter Bank; Yan Dolinsky 
Abstract:  We consider an investor who is dynamically informed about the future evolution of one of the independent Brownian motions driving a stock's price fluctuations. With linear temporary price impact the resulting optimal investment problem with exponential utility turns out to be not only well posed, but it even allows for a closedform solution. We describe this solution and the resulting problem value for this stochastic control problem with partial observation by solving its convexanalytic dual problem. 
Date:  2023–02 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2302.10485&r=upt 
By:  Deepanshu Vasal 
Abstract:  In this paper, we consider a mean field model of social behavior where there are an infinite number of players, each of whom observes a type privately that represents her preference, and publicly observes a mean field state of types and actions of the players in the society. The types (and equivalently preferences) of the players are dynamically evolving. Each player is fully rational and forwardlooking and makes a decision in each round t to buy a product. She receives a higher utility if the product she bought is aligned with her current preference and if there is a higher fraction of people who bought that product (thus a game of strategic complementarity). We show that for certain parameters when the weight of strategic complementarity is high, players eventually herd towards one of the actions with probability 1 which is when each player buys a product irrespective of her preference. 
Date:  2023–03 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2303.03303&r=upt 
By:  Daisuke Matsuzaki; Yoshiyasu Ono 
Abstract:  When faced with economic stagnation, innovation, product innovation in particular, is often cited as an effective stimulus because it is thought to encourage household consumption and lead to higher demand. Using a secular stagnation model with wealth preference, we examine the effects of product innovation on employment and consumption. Two types of product innovation are examined: quantityaugmentinglike innovation and addictive innovation. The former works as if a larger quantity were consumed although the actual quantity remains the same. The latter reduces the elasticity of the marginal utility of consumption. We find that the former reduces both consumption and employment whereas the latter expands them. 
Date:  2023–03 
URL:  http://d.repec.org/n?u=RePEc:dpr:wpaper:1204&r=upt 
By:  Keisuke Kondo (Research Institute of Economy, Trade and Industry and Research Institute for Economics and Business Administration, Kobe University, JAPAN) 
Abstract:  This study proposes a novel concept of regional attractiveness index based on human mobility flows. Assuming that individuals' mobility choice is based on utility maximization, this study aims to recover the attractiveness of trip destinations by estimating the gravity equation for interregional trip flows. Using data from a Person Trip Survey in the Kansai region of Japan, this study investigates whether different trip purposes (e.g., commuting to office and school, recreational trips, business trips, and returning home) can reveal variations in the attractiveness of trip destinations in a geographical space. This study found that the proposed approach using interregional trip flows can effectively capture the extent to which trip destinations attract people from a regionwide perspective. As realtime human mobility data becomes increasingly available in the age of Big Data, the new index of regional attractiveness is expected to become a key performance indicator for daily monitoring of urban and regional economies. 
Keywords:  Regional attractiveness index; Person trip survey; Gravity equation 
JEL:  J61 R23 R41 
Date:  2023–03 
URL:  http://d.repec.org/n?u=RePEc:kob:dpaper:dp202307&r=upt 
By:  Sujoy Mukerji (QMUL  Queen Mary University of London); Han N Ozsoylev (Özyeğin University); Jean‐marc Tallon 
Abstract:  We consider nancial markets with heterogeneously ambiguous assets and heterogeneously ambiguity averse investors. Investors' preferences, a version of the smooth ambiguity model, are a parsimonious extension of the standard meanvariance framework. We consider, in a uni ed setting, portfolio choice, and trade upon arrival of public information, and show, in both cases, there are systematic departures from the predictions of standard theory. These departures are of signi cance as they occur in the direction of empirical regularities that belie the standard theory. In particular, our theory speaks to several puzzling phenomena in a uni ed fashion: the asset allocation puzzle, the observation that earnings announcements are often followed by signi cant trading volume with small price change, and that increases in uncertainty are positively associated with increased trading activity and portfolio rebalancing toward safer assets by individual (retail) investors 
Keywords:  Ambiguity, Ambiguity aversion, Earnings announcements, Parameter uncertainty, Portfolio choice, Trading volume, Uncertainty shocks 
Date:  2023 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:halshs03962563&r=upt 
By:  Dietrich, Stephan (RS: GSBE MGSoG, Maastricht Graduate School of Governance, RS: UNUMERIT Theme 2); Nichols, Stafford 
Abstract:  Climate impact models are forced to make sweeping assumptions when estimating social and economic welfare damages to countries around the world, because of a lack of data and understanding of local causal mechanisms. In this paper, we estimate the effects of rising temperatures on countries around the world using an experienced utility approach, based on subjective wellbeing survey data collected in 160 countries for 13 years. We take advantage of 40 years of variation in daily land surface temperature data, to find that one exceptionally hot day significantly lowers wellbeing. Furthermore, the effect size varies substantially between and within countries. Identifying this high degree of heterogeneity is important because it illustrates the shortcomings of many current models which are geographically coarse. Moreover, we compare the marginal utility of income and nonincome effects and find that income accounts for only a small proportion of the damages caused by extreme temperature s. This demonstrates the adverse effect on nonmarket goods is dramatically higher than previously assumed, which indicates current models are missing a fundamental source of climaterelated damages. 
JEL:  I31 Q51 Q54 O15 
Date:  2023–02–24 
URL:  http://d.repec.org/n?u=RePEc:unm:unumer:2023005&r=upt 
By:  Krueger, Dirk; Uhlig, Harald 
Abstract:  This paper characterizes the stationary equilibrium of a continuoustime neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through longterm insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have logutility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006). 
Keywords:  Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium 
JEL:  E21 D11 D91 G22 
Date:  2023 
URL:  http://d.repec.org/n?u=RePEc:zbw:cfswop:698&r=upt 
By:  Nicolas Treich (TSER  Toulouse School of Economics  UT1  Université Toulouse 1 Capitole  Université Fédérale Toulouse MidiPyrénées  EHESS  École des hautes études en sciences sociales  CNRS  Centre National de la Recherche Scientifique  INRAE  Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Yuting Yang (TSER  Toulouse School of Economics  UT1  Université Toulouse 1 Capitole  Université Fédérale Toulouse MidiPyrénées  EHESS  École des hautes études en sciences sociales  CNRS  Centre National de la Recherche Scientifique  INRAE  Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) 
Abstract:  Standard benefitcost analysis often ignores distortions caused by taxation and the heterogeneity of taxpayers. In this paper, we theoretically and numerically explore the effect of imperfect taxation on the public provision of mortality risk reductions (or public safety). We show that this effect critically depends on the source of imperfection as well as on the individual utility and survival probability functions. Our simulations based on the calibration of distributional weights and applied to the COVID19 example suggest that the value per statistical life, and in turn the optimal level of public safety, should be adjusted downwards because of imperfect taxation. However, we also identify circumstances under which this result is reversed, so that imperfect taxation cannot generically justify less public safety. 
Keywords:  Public safetyE, Environmental health, Imperfect taxation, Value per statistical life, Distortionary taxation, Wealth inequality, Risk aversion 
Date:  2021–03 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal03158749&r=upt 
By:  Ilke AYDOGAN (IESEG School of Management, Univ. Lille, CNRS, UMR 9221  LEM  Lille Economie Management, F59000 Lille, France; and iRisk Research Center on Risk and Uncertainty); Loïc BERGER (CNRS, Univ. Lille, IESEG School of Management, UMR 9221  LEM  Lille Economie Management, F59000 Lille, France; iRisk Research Center on Risk and Uncertainty; RFFCMCC European Institute on Economics and the Environment (EIEE), and Centro EuroMediterraneo sui Cambiamenti Climatici, Italy); Vincent THEROUDE (Université de Lorraine, Université de Strasbourg, CNRS, BETA, 54000, Nancy, France) 
Abstract:  WeThis paper explores the drivers of individual preferences under uncertainty. We propose a characterization of the situations of model uncertainty such as the ones introduced by Ellsberg (1961) by building on the more ambiguous relations of Jewitt and Mukerji (2017) and Izhakian (2020) and on two new more complex relations. Re considering existing data sets from the recent literature and combining them with new experimental evidence, we show that uncertainty preferences can be driven by considerations regarding both the degree of complexity and ambiguity that a situation entails. 
Keywords:  : Ambiguity, model uncertainty, complexity, Ellsberg paradox 
JEL:  D81 
Date:  2023–03 
URL:  http://d.repec.org/n?u=RePEc:ies:wpaper:e202303&r=upt 
By:  Guenther, Benno; Lordan, Grace 
Abstract:  We conducted a withinsubject experiment with 193 professional traders (151 professional commodities traders), to examine how the tendency towards the disposition effect varies across decisionmaking in mean reverting commodities and nonmean reverting equities contexts. In addition, we consider whether a simple informational intervention that makes the disposition effect salient can alter decisionmaking. Overall, we find that prior to the intervention the traders exhibit the disposition effect in the direction that aligns with profit maximisation goals suggesting that they are acting rational. For example, when being asked to make decisions on commodities the traders make choices in the direction of the disposition effect, which is rational given that these picks are mean reverting. We also find that the informational intervention is effective in changing the level of the disposition effect observed and also decisionmaking, regardless of whether traders are considering decisions over mean reverting or nonmean reverting securities. Further, we provide evidence that our simple informational intervention improves trader returns when making decisions on nonmean reverting securities only. In contrast, it has negative impacts when utilised for commodities. Our study highlights the power of simple interventions to make disproportionately large changes to decisionmaking regardless of whether they are in our best interests, and their beneficial role only when the context is right. 
Keywords:  disposition effect; prospect theory; commodities; behavioural finance; trading decisionmaking; Frontiers deal 
JEL:  G11 
Date:  2023–02–23 
URL:  http://d.repec.org/n?u=RePEc:ehl:lserod:118353&r=upt 