|
on Utility Models and Prospect Theory |
|
Issue of 2023‒05‒22
thirteen papers chosen by |
| By: | Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS) |
| Abstract: | This paper studies the impact of unreliable information sources on the decision process under ambiguity. Using a modified Ellsberg framework, it compares two types of agents: one is a Savage expected utility maximizer and the other a Neo-Choquet-type expected utility maximizer. This comparison shows that while the former will always conform to the source of information regardless of its level of reliability, the latter will make its choice based on its levels of preference/aversion for ambiguity and its degree of optimism/pessimism. Therefore, this explains why decision-makers may choose randomly when the reliability of the information source is too low. |
| Keywords: | Uncertainty theory, decision theory, ambiguity aversion, Information |
| JEL: | I1 I18 I19 D80 D81 D83 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2022-21&r=upt |
| By: | Lijun Bo; Yijie Huang; Xiang Yu |
| Abstract: | This paper studies a Merton's optimal portfolio and consumption problem in an extended formulation incorporating the tracking of a benchmark process described by a geometric Brownian motion. We consider a relaxed tracking formulation such that that the wealth process compensated by a fictitious capital injection outperforms the external benchmark at all times. The fund manager aims to maximize the expected utility of consumption deducted by the cost of the capital injection, where the latter term can also be regarded as the expected largest shortfall with reference to the benchmark. By introducing an auxiliary state process with reflection, we formulate and tackle an equivalent stochastic control problem by means of the dual transform and probabilistic representation, where the dual PDE can be solved explicitly. On the strength of the closed-form results, we can derive and verify the feedback optimal control in the semi-analytical form for the primal control problem, allowing us to observe and discuss some new and interesting financial implications on portfolio and consumption decision making induced by the additional risk-taking in capital injection and the goal of tracking. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.10802&r=upt |
| By: | Simon, Frederik; Weibels, Sebastian; Zimmermann, Tom |
| Abstract: | We directly optimize portfolio weights as a function of firm characteristics via deep neural networks by generalizing the parametric portfolio policy framework. Our results show that network-based portfolio policies result in an increase of investor utility of between 30 and 100 percent over a comparable linear portfolio policy, depending on whether portfolio restrictions on individual stock weights, short-selling or transaction costs are imposed, and depending on an investor's utility function. We provide extensive model interpretation and show that network-based policies better capture the non-linear relationship between investor utility and firm characteristics. Improvements can be traced to both variable interactions and non-linearity in functional form. Both the linear and the network-based approach agree on the same dominant predictors, namely past return-based firm characteristics. |
| Keywords: | Portfolio Choice, Machine Learning, Expected Utility |
| JEL: | G11 G12 C58 C45 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:2301&r=upt |
| By: | Jian Yang |
| Abstract: | We are concerned with the stability of a coalitional game, i.e., a transferable-utility (TU) cooperative game. First, the concept of core can be weakened so that the blocking of changes is limited to only those with multilateral backings. This principle of consensual blocking, as well as the traditional core-defining principle of unilateral blocking and one straddling in between, can all be applied to partition-allocation pairs. Each such pair is made up of a partition of the grand coalition and a corresponding allocation vector whose components are individually rational and efficient for the various constituent coalitions of the given partition. For the resulting strong, medium, and weak stability concepts, the first is core-compatible in that the traditional core exactly contains those allocations that are associated through this strong stability concept with the all-consolidated partition consisting of only the grand coalition. Probably more importantly, the latter medium and weak stability concepts are universal. By this, we mean that any game, no matter how ``poor'' it is, has its fair share of stable solutions. There is also a steepest ascent method to guide the convergence process to a mediumly stable partition-allocation pair from any starting partition. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.10651&r=upt |
| By: | Charles Hulten; Leonard I. Nakamura |
| Abstract: | GDP is a closely watched indicator of the current health of the economy and an important tool of economic policy. It has been called one of the great inventions of the 20th century. It is not, however, a persuasive indicator of individual well-being or economic progress. There have been calls to refocus or replace GDP with a metric that better reflects the welfare dimension. In response, the U.S. agency responsible for the GDP accounts recently launched the GDP and Beyond program. This is by no means an easy undertaking, given the subjective and idiosyncratic nature of much of individual well-being. This paper joins the Beyond GDP effort by extending the standard utility maximization model of economic theory, using an expenditure function approach to include those non-GDP sources of well-being for which a monetary value can be established. We term our new measure expanded GDP (EGDP). A welfare-adjusted stock of wealth is also derived using the same general approach used to obtain EGDP. This stock is useful for issues involving the sustainability of well-being over time. One of the implications of this dichotomy is that conventional cost-based wealth may increase over a period of time, while welfare-corrected wealth may show a decrease (due, for example, to strongly negative environmental externalities). |
| Keywords: | Beyond GDP; National Accounts; Internet; Information; Inflation; Welfare; Well-Being |
| JEL: | C43 C51 C82 O4 |
| Date: | 2022–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:95083&r=upt |
| By: | Eesha Sharma; Stephanie Tully; Xiang Wang |
| Abstract: | Scarcity is a ubiquitous experience, and existing evidence largely suggests that people become more myopic when they feel their resources are scarce. Importantly, evidence for this proposition comes primarily from contexts in which scarcity threatens needs that require resources imminently. The current work examines instances in which scarcity threatens needs along a broader time horizon. Archival data from the Federal Reserve Bank of Philadelphia’s Consumer Finance Institute and five pre-registered studies (N = 7, 728) show that the time horizon of threatened needs is an important determinant of scarcity’s effect on intertemporal choice. Studies 1 and 2 measure perceptions of scarcity and demonstrate that scarcity’s effect on intertemporal choice is moderated by the time horizon of people's needs. Study 3 experimentally manipulates perceptions of scarcity and demonstrates a polarizing effect of scarcity on intertemporal choice. When scarcity threatens needs with shorter time horizons, scarcity increases choices of smaller, sooner outcomes; however, this effect attenuates and sometimes reverses when scarcity threatens needs with longer time horizons. Studies 4-6 examine process evidence and find that the effect of scarcity on intertemporal choice is driven at least in part by differences in the perceived relative marginal utility of intertemporal choice options, rather than other factors such as a general change in time preference. Our findings suggest that scarcity does not inherently lead to myopic decisions and contribute to the ongoing debate regarding how and why scarcity influences intertemporal choice. |
| Keywords: | scarcity; myopia; intertemporal choice; financial decision-making; economic psychology |
| JEL: | D11 D15 D91 G51 |
| Date: | 2022–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94693&r=upt |
| By: | Jian Yang |
| Abstract: | We deal with coalitional games possessing strictly positive values. Individually rational allocations of such a game has clear fractional interpretations. Many concepts, including the long-existing core and other stability notions more recently proposed by Yang \cite{Y22}, can all be re-cast in this fractional mode. The latter allows a certain ranking between games, which we deem as in the sense of ``centripetality'', to imply a clearly describable shift in the games' stable solutions. %These trends would be preserved after the imposition of the restriction that fractions be positive as well. When coalitions' values are built on both random outcomes and a common positively homogeneous reward function characterizing players' enjoyments from their shares, the above link could help explain why aversion to risk often promotes cooperation. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.10652&r=upt |
| By: | Matthias Sutter (Max Planck Institute for Research on Collective Goods, Bonn, University of Cologne, University of Innsbruck, IZA Bonn, and CESifo Munich); Michael Weyland (Ludwigsburg University of Education); Anna Untertrifaller (University of Cologne); Manuel Froitzheim (University of Siegen); Sebastian O. Schneider (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | We present the results of a randomized intervention to study how teaching financial literacy to 16-year old high-school students affects their behavior in risk and time preference tasks. Compared to two different control treatments, we find that teaching financial literacy makes subjects behave more patiently, more time-consistent, and more risk-averse. These effects persist for up to almost 5 years after our intervention. Behavior in the risk and time preference tasks is related to financial behavior outside the lab, in particular spending patterns. This shows that teaching financial literacy affects economic decision-making which in turn is important for field behavior. |
| Keywords: | Financial literacy, randomized intervention, risk preferences, time preferences, financial behavior, field experiment |
| JEL: | C93 D14 I21 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:229&r=upt |
| By: | Creedy, John; Subramanian, S. |
| Abstract: | This paper explores a single-parameter generalization of the Gini inequality measure. Taking the starting point to be the Borda-type social welfare function, which is known to generate the standard Gini measure, in which incomes (in ascending order) are weighted by their inverse rank, the generalisation uses a class of non-linear functions. These are based on the so-called ‘metallic sequences’ of number theory, of which the Fibonacci sequence is the best-known. The value judgements implicit in the measures are explored in detail. Comparisons with other well-known Gini measures, along with the Atkinson measure, are made. These are examined within the context of the famous ‘leaky bucket’ thought experiment, which concerns the maximum leak that a judge is prepared to tolerate, when making an income transfer from a richer to a poorer person. Inequality aversion is thus viewed in terms of being an increasing function of the leakage that is regarded as acceptable. |
| Keywords: | Income inequality, Gini coefficient, Extensions of Gini, Social welfare functions, Equally distributed equivalent income, Atkinson, Inequality aversion, Value judgements, Efficiency and equity, Leaky bucket experiment, |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwcpf:25477&r=upt |
| By: | André de Palma; Karim Kilani (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper builds upon the work of Professor Marley, who, since the beginning of his long research career, has proposed rigorous axiomatics in the area of probabilistic choice models. Our study concentrates on models that can be applied to best and worst choice scaling experiments. We focus on those among these models that are based on strong assumptions about the underlying ranking of the alternatives with which the individual is assumed to be endowed when making the choice. Taking advantage of an inclusion-exclusion identity that we showed a few years ago, we propose a variety of best-worst choice probability models that could be implemented in software packages that are flourishing in this field. |
| Keywords: | International Trade, Market Potential, Economic Geography, Regional Development, Core-Periphery. |
| JEL: | F14 F15 O18 R11 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2023-06&r=upt |
| By: | Sidharth Ranjan; Titus von der Malsburg |
| Abstract: | The principle of DEPENDENCY LENGTH MINIMIZATION, which seeks to keep syntactically related words close in a sentence, is thought to universally shape the structure of human languages for effective communication. However, the extent to which dependency length minimization is applied in human language systems is not yet fully understood. Preverbally, the placement of long-before-short constituents and postverbally, short-before-long constituents are known to minimize overall dependency length of a sentence. In this study, we test the hypothesis that placing only the shortest preverbal constituent next to the main-verb explains word order preferences in Hindi (a SOV language) as opposed to the global minimization of dependency length. We characterize this approach as a least-effort strategy because it is a cost-effective way to shorten all dependencies between the verb and its preverbal dependencies. As such, this approach is consistent with the bounded-rationality perspective according to which decision making is governed by "fast but frugal" heuristics rather than by a search for optimal solutions. Consistent with this idea, our results indicate that actual corpus sentences in the Hindi-Urdu Treebank corpus are better explained by the least effort strategy than by global minimization of dependency lengths. Additionally, for the task of distinguishing corpus sentences from counterfactual variants, we find that the dependency length and constituent length of the constituent closest to the main verb are much better predictors of whether a sentence appeared in the corpus than total dependency length. Overall, our findings suggest that cognitive resource constraints play a crucial role in shaping natural languages. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.11410&r=upt |
| By: | Miguel Risco |
| Abstract: | In today’s world, social networks have a significant impact on information processes, shaping individuals’ beliefs and influencing their decisions. This paper proposes a model to understand how boundedly rational (DeGroot) individuals behave when seeking information to make decisions in situations where both social communication and private learning take place. The model assumes that information is a local public good, and individuals must decide how much effort to invest in costly information sources to improve their knowledge of the state of the world. Depending on the network structure and agents’ positions, some individuals will invest in private learning, while others will free-ride on the social supply of information. The model shows that multiple equilibria can arise, and uniqueness is controlled by the lowest eigenvalue of a matrix determined by the network. The lowest eigenvalue roughly captures how two-sided a network is. Two-sided networks feature multiple equilibria. Under a utilitarian perspective, agents would be more informed than they are in equilibrium. Social welfare would be improved if influential agents increased their information acquisition levels. |
| Keywords: | Information Acquisition, Learning, Public Goods, Network Effects, Information Diffusion, Bounded Rationality |
| JEL: | C72 D61 D83 D85 H41 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_420&r=upt |
| By: | Ziwei Wang; Jiabin Wu |
| Abstract: | We present a model that investigates preference evolution with endogenous matching. In the short run, individuals' subjective preferences simultaneously determine who they are matched with and how they behave in the social interactions with their matched partners, which results in material payoffs for them. Material payoffs in turn affect how preferences evolve in the long run. To properly model the "match-to-interact" process, we combine stable matching and equilibrium concepts. Our findings emphasize the importance of parochialism, a preference for matching with one's own kind, in shaping our results. Under complete information, the parochial efficient preference type -- characterized by a weak form of parochialism and a preference for efficiency -- stands out in the evolutionary process, because it is able to force positive assortative matching and efficient play among individuals carrying this preference type. Under incomplete information, the exclusionary efficient preference type -- characterized by a stronger form of parochialism and a preference for efficiency -- prevails, as it provides individuals with an incentive to engage in self-sorting through rematching in any matching outcomes that involve incomplete information and inefficient play. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.11504&r=upt |