|
on Utility Models and Prospect Theory |
|
Issue of 2023‒05‒01
ten papers chosen by |
| By: | Marinacci Massimo (Department of Decision Sciences and IGIER, Bocconi University, Italy;); Principi Giulio (Department of Economics, New York University, USA;); Stanca Lorenzo (Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and Collegio Carlo Alberto, University of Torino, Italy;) |
| Abstract: | We illustrate the strong implications of recursivity, a standard assumption in dynamic environments, on attitudes toward uncertainty. In intertemporal consumption choice problems, recursivity always implies constant absolute ambiguity aversion (CAAA) when applying the standard dynamic extension of monotonicity. Our analysis also yields a functional equation called ``generalized rectangularity", as it generalizes the standard notion of rectangularity for recursive maxmin preferences to general certainty equivalents. Our results highlight that if uncertainty aversion is modeled as a form of convexity of preferences, recursivity limits us to only recursive variational preferences. |
| Keywords: | Dynamic choice, Recursive utility, uUncertainty aversion, Absolute attitudes, Generalized rectangularity. |
| JEL: | C61 D81 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:082&r=upt |
| By: | Kulawik, Jacek |
| Abstract: | Teoria/hipoteza użyteczności oczekiwanej (ang. the expected utility theory, EUT lub ET) von Neumanna i Morgensterna już w momencie zaprezentowania jej kompletnej, aksjomatycznej formy (1953 r.) stała się przedmiotem krytyki oraz wysiłków, by ją „ulepszyć”. Najszerszą analizę przeprowadzili Kahneman i Tversky za pomocą stworzonej przez siebie teorii perspektywy (the prospect theory, PT). Nie była to jednakże konstrukcja dopracowana. Z pomocą powyższej dwójce przyszedł w 1982 r. Quiggin ze swoim rozszerzeniem EUT w postaci rank dependent expected utility (RDEU). W ślad za tym Kahneman i Tversky w 1992 r. mogli pochwalić się drugą wersją teorii perspektywy, tj. postacią skumulowaną (CPT). To ona właśnie stała się najbardziej konkurencyjną propozycją wobec EUT, mimo że w późniejszych latach inni badacze dodali do niej nowe elementy. W ten sposób powstawały kolejne generacje PT. Dziś jest ich w sumie pięć. Jak zwykle, szybko okazało się, że PT także niezadowalająco objaśnia różne przypadki podejmowania decyzji w warunkach ryzyka i niepewności. Po dokładniejszej analizie okazało się jednak, że PT jest w istocie generalizacją EUT. Obydwie te teorie są m.in. narzędziem modelowania decyzji ubezpieczeniowych, w tym także w rolnictwie. W tym kontekście podstawowym celem artykułu jest bliższe przedstawienie zasad oraz uzyskiwanych rezultatów ich stosowania w ubezpieczeniach rolnych. Z dokonanej analizy wynika, że pragmatycznym rozwiązaniem obecnie jest łączne wykorzystywanie obydwu teorii, przy czym EUT zazwyczaj powinna być punktem odniesienia. |
| Keywords: | Agricultural Finance, Financial Economics, Risk and Uncertainty |
| Date: | 2023–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iafepa:333731&r=upt |
| By: | Pierre-Carl Michaud (HEC Montreal); Pascal St-Amour (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute) |
| Abstract: | Annuities, long-term care insurance and reverse mortgages remain unpopular to manage longevity, medical and housing price risks after retirement. We analyze low demand using a life-cycle model structurally estimated with a unique stated-preference survey experiment of Canadian households. Low risk aversion, substitution between housing and consumption and low marginal utility when in poor health explain most of the reduced demand. Bequests motives are found to be a luxury good and play a limited role. The remaining disinterest is explained by information frictions and behavioural status-quo biases. We find evidence of strong spousal co-insurance motives motivating LTCI and of responsiveness to bundling with a near doubling of demand for annuities when reverse mortgages can be used to annuitize, instead of consuming home equity. |
| Keywords: | retirement wealth, insurance, health risk, housing risk |
| JEL: | J14 G52 G53 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2318&r=upt |
| By: | Steven Shavell |
| Abstract: | In this article I first describe the basic principles that parents employ in disciplining their children. The description is based on a survey of parents, the major results of which are that parental sanctions are premised on wrongdoing—not on the mere causation of harm; that parental sanctions tend to be greater when wrongdoing results in harm than when it does not; that parental sanctions for intentionally harmful conduct exceed those for negligence; and that parental sanctions are not raised when the probability that wrongdoing would be discovered is low. I then develop a theory to explain the principles of discipline as functional for parents. The kernel of the theory is that the rules of discipline maximize the expected utility of parents—assuming that the utility of parents is reduced by the occurrence of harm and also reflects the well–being of their children. After elaborating the theory, I comment on several related issues, including the possible influence of childhood experience on our preferences as adults over legal rules; and I remark on the interpretation of the similarity between the principles of criminal law and those applied by parents in disciplining their children. |
| JEL: | D01 K00 K1 K10 K13 K14 K41 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31090&r=upt |
| By: | Christian Mitsch |
| Abstract: | This paper focuses on a decentralized profit-center firm that uses negotiated transfer pricing as an instrument to coordinate the production process. Moreover, the firm's headquarters gives its divisions full authority over operating decisions and it is assumed that each division can additionally make an upfront investment decision that enhances the value of internal trade. On early works, the paper expands the number of divisions by one downstream division and relaxes basic assumptions, such as the assumption of common knowledge of rationality. Based on an agent-based simulation, it is examined whether cognitively bounded individuals modeled by fuzzy Q-learning achieve the same results as fully rational utility maximizers. In addition, the paper investigates different constellations of bargaining power to see whether a deviation from the recommended optimal bargaining power leads to a higher managerial performance. The simulation results show that fuzzy Q-learning agents perform at least as well or better than fully individual rational utility maximizers. The study also indicates that, in scenarios with different marginal costs of divisions, a deviation from the recommended optimal distribution ratio of the bargaining power of divisions can lead to higher investment levels and, thus, to an increase in the headquarters' profit. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.14515&r=upt |
| By: | Avi Lichtig; Ran Weksler |
| Abstract: | Does a better-informed sender transmit more accurate information in equilibrium? We show that, in a general class of voluntary disclosure games, unlike other strategic communication environments, the answer is positive. If the sender’s evidence is more Blackwell informative, then the receiver’s equilibrium utility increases. We apply our main result to show that an uninformed sender who chooses a test from a Blackwell-ordered set does so efficiently. |
| Keywords: | Evidence, Informativeness |
| JEL: | D82 D83 L15 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_405&r=upt |
| By: | Ilke Aydogan; Loïc Berger; Vincent Théroude |
| Abstract: | This 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. Reconsidering 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 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-10&r=upt |
| By: | Mohib Jafri; Andy Wu |
| Abstract: | Using a combination of incentive modeling and empirical meta-analyses, this paper provides a pointed critique at the incentive systems that drive venture capital firms to optimize their practices towards activities that increase General Partner utility yet are disjoint from improving the underlying asset of startup equity. We propose a "distributed venture firm" powered by software automations and governed by a set of functional teams called "Pods" that carry out specific tasks with immediate and long-term payouts given on a deal-by-deal basis. Avenues are provided for further research to validate this model and discover likely paths to implementation. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.03525&r=upt |
| By: | Laurent Gauthier (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis) |
| Abstract: | Explaining culture through contagion mechanics has appealed to some anthropologists, from a theoretical standpoint, and some quantitative sociologists have proposed formal models for this phenomenon. Studying the spread of culture through the lens of epidemiology has a kind of natural appeal, as it seems to intuitively make sense. The dynamics of epidemics, with their sometimes explosive behavior in a pandemic, combined with oscillations or endemic patterns, seem to capture the phase transitions of cultural spread. The particular links between economics and epidemiology were surveyed in Avery et al. (2020): economics can bring new perspectives in epidemiological modeling by endogenizing certain parameters, which can have a significant impact on how contagion dynamics are understood and projected. The research into the endogeneization of important parameters in epidemiological models, however, has been purely concentrated on medical or biological applications. We propose a utility-based model for cultural contagion, which extends the class of so-called SIR models in epidemiology, and apply it first to the spread of Romanity in the ancient Greek world, through the dynamics of Roman names acquisition, and then to the spread of Christianism through Christian names acquisition. The dynamics of the transition from a pure Greek world to a Romanized world, explosive at the outset, appear to have been fundamentally driven by an intense adoption of Romanity, but combined with an equally intense return to traditional Greek traits. The transition from pagan to Christian names, on the other hand, saw less of a reversal effect. |
| Keywords: | Onomastics, Epidemiology, Game theory, Ancient Greece |
| Date: | 2023–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03991811&r=upt |
| By: | Marlon Azinovic; Jan \v{Z}emli\v{c}ka |
| Abstract: | Contemporary deep learning based solution methods used to compute approximate equilibria of high-dimensional dynamic stochastic economic models are often faced with two pain points. The first problem is that the loss function typically encodes a diverse set of equilibrium conditions, such as market clearing and households' or firms' optimality conditions. Hence the training algorithm trades off errors between those -- potentially very different -- equilibrium conditions. This renders the interpretation of the remaining errors challenging. The second problem is that portfolio choice in models with multiple assets is only pinned down for low errors in the corresponding equilibrium conditions. In the beginning of training, this can lead to fluctuating policies for different assets, which hampers the training process. To alleviate these issues, we propose two complementary innovations. First, we introduce Market Clearing Layers, a neural network architecture that automatically enforces all the market clearing conditions and borrowing constraints in the economy. Encoding economic constraints into the neural network architecture reduces the number of terms in the loss function and enhances the interpretability of the remaining equilibrium errors. Furthermore, we present a homotopy algorithm for solving portfolio choice problems with multiple assets, which ameliorates numerical instabilities arising in the context of deep learning. To illustrate our method we solve an overlapping generations model with two permanent risk aversion types, three distinct assets, and aggregate shocks. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.14802&r=upt |