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on Utility Models and Prospect Theory |
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Issue of 2023‒07‒24
sixteen papers chosen by |
| By: | Matthew D. Rablen |
| Abstract: | Loss aversion, risk aversion, and the probability weighting function (PWF) are three central concepts in explaining decisionmaking under risk. I examine interlinkages between these concepts in a model of decisionmaking that allows for loss averse/tolerant stochastic reference dependence and optimism/pessimism over probability distributions. I give a preference interpretation to commonly observed shapes of PWF and to risk aversion. In particular, I establish a connection between loss aversion and both risk aversion and the inverse-S PWF: loss aversion is a necessary condition to observe each of these phenomena. The results extend to distinct PWFs in the gain and loss domains, as under prospect theory. |
| Keywords: | probability weighting, rank dependent expected utility, loss aversion, risk aversion, reference dependence, optimism, pessimism, prospect theory |
| JEL: | D91 D81 D01 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10491&r=upt |
| By: | Hans-Martin von Gaudecker; Axel Wogrolly; Christian Zimpelmann |
| Abstract: | This paper analyzes the stability and distribution of ambiguity attitudes using a broad population sample. Using high-powered incentives, we collected six waves of data on ambiguity attitudes about financial markets—our main application—and climate change. Estimating a structural stochastic choice model, we obtain three individuallevel parameters: Ambiguity aversion, likelihood insensitivity, and the magnitude of decision errors. These parameters are very heterogeneous in the population. At the same time, they are stable over time and largely stable across domains.We summarize heterogeneity in these three dimensions using a discrete classification approach with four types. Each group makes up 20-30% of the sample. One group comes close to the behavior of expected utility maximizers. Two types are characterized by high likelihood insensitivity; one of them is ambiguity averse and the other ambiguity seeking. Members of the final group have large error parameters; robust conclusions about their ambiguity attitudes are difficult. Observed characteristics vary between groups in plausible ways. Ambiguity types predict risky asset holdings in the expected fashion, even after controlling for many covariates. |
| Keywords: | ambiguity attitudes; temporal stability; domain specificity; sociodemographic factors; cluster analysis; household portfolio choice |
| JEL: | D81 G41 C38 D14 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_272v2&r=upt |
| By: | Alex Gershkov (Department of Economics and the Federmann Center for the Study of Rationality, The Hebrew University of Jerusalem, and School of Economics, University of Surrey); Benny Moldovanu (Department of Economics, University of Bonn); Philipp Strack (Department of Economics, Yale University, New Haven); Mengxi Zhang (Departmentof Economics, University of Bonn) |
| Abstract: | We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz [1977]) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs, or menus of insurance with coverage limits-premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari [1987]). |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:242&r=upt |
| By: | Thai Ha-Huy (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay); Cuong Le Van (IPAG Business School, 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); Myrna Wooders (Vanderbilt University [Nashville]) |
| Abstract: | We consider a pure exchange asset model with a finite number of agents and a finite number of states of nature where short sells are allowed. We present the definition of weak no-arbitrage price, a weaker notion of noarbitrage price than the one of Werner, and prove that if the utility functions satisfy the maximal and closed gradients conditions we propose in this paper, then there exists an equivalence between existence of a general equilibrium and existence of a price which is weak no-arbitrage price for all the agents. |
| Keywords: | asset market equilibrium, individually rational attainable allocations, individually rational utility set, no-arbitrage prices, no-arbitrage condition |
| Date: | 2023–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04131008&r=upt |
| By: | Arthur E. Attema (Erasmus University Rotterdam); Olivier L'Haridon (IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche, CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Gijs van de Kuilen (Tilburg University [Netherlands]) |
| Abstract: | In this paper, we use the risk apportionment technique of Eeckhoudt, Rey and Schlesinger (2007) to study higher order risk preferences for others' health as well as ex-ante and ex-post inequality preferences for social risky distributions, and their interaction. In an experiment on a sample of university students acting as impartial spectators, we observe risk aversion towards social health losses and a dislike of ex-ante inequality. In addition, evidence for ex-post inequality seeking is much weaker than evidence for ex-ante inequality aversion. Because ex-ante inequality aversion is unrelated to risk aversion, we conclude that simple forms of utilitarianism are not relevant for individual judgment of social risk over health. Last, our investigation of precautionary distribution, which would occur when one particular group in the society suffers from background health risk, shows substantial polarization of preferences. |
| Keywords: | Social risk, Ex-ante social welfare, Ex-post social welfare, Risk apportionment |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04116959&r=upt |
| By: | Arthur E. Attema (Erasmus University Rotterdam); Olivier L'Haridon (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, UGENT - Universiteit Gent = Ghent University); Gijs van de Kuilen (Tilburg University [Netherlands]) |
| Abstract: | This study reports the results of the first artefactual field experiment designed to measure the prevalence of aversion toward different components of social risks in a large and demographically representative sample. We identify social risk preferences for health and wealth for losses and gains, and decompose these attitudes into four different dimensions: individual risk, collective risk, ex-post inequality, and ex-ante inequality. The results of a non-parametric analysis suggest that aversion to risk and inequality is the mean preference for outcomes in health and wealth in the domain of gains and losses. A parametric decomposition of aversion to risk and inequality shows that respondents are averse to ex-post and ex-ante inequality in health and wealth for gains and losses. Likewise, respondents are averse to collective risk, but neutral to individual risk, which highlights the importance of considering different components of social risk preferences when managing social health and wealth risks. |
| Keywords: | Inequality, Risk aversion, Social risk |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04116983&r=upt |
| By: | Thai Ha-Huy (Université Paris-Saclay, EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay); Cuong Le Van (IPAG Business School, VCREME - Van Xuan Center of Research in Economics, Management and Environment, 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) |
| Abstract: | We consider a model with a countably infinite number of states of nature. The agents have equivalent probability beliefs and von Neumann-Morgenstern utilities. The No-Arbitrage Prices in this this paper are, up to a scalar, the marginal utilities. We introduce the Beliefs Strong Equivalence and the No Half Line Condition of the same type conditions. Under these conditions, the No Arbitrage price condition is sufficient for the existence of an equilibrium when the commodity space is l p , 1 ≤ p |
| Keywords: | beliefs strong equivalence, asset market equilibrium, individually rational attainable allocations, individually rational utility set, no-arbitrage prices, no-arbitrage condition |
| Date: | 2023–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04130993&r=upt |
| By: | Frédéric Koessler (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); Marieke Pahlke (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 use a notion of maxmin self-confirming equilibrium (MSCE) to study the optimal design of players' feedbacks about others' behavior in games with ambiguity averse players. Coarse feedbacks shape strategic uncertainty and can therefore modify players' equilibrium strategies in an advantageous way. We characterize MSCE and study the equilibrium implications of coarse feedbacks in various classes of games. We show how feedbacks should be optimally designed to improve contributions in generalized volunteer dilemmas and public good games with strategic substitutes, strategic complements, or more general production functions. We also study games with negative externalities and strategic substitutes such as Cournot oligopolies. In general, perfect and no feedbacks are suboptimal. Some results are extended to α-maxmin preferences. |
| Keywords: | Self-confirming equilibrium, Ambiguity aversion, Information feedback, Strategic uncertainty, Public good games, Volunteer dilemma |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-04039083&r=upt |
| By: | Loduca, Natalie R.; Swinton, Scott M. |
| Keywords: | Risk and Uncertainty, Research Methods/Statistical Methods, Environmental Economics and Policy |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea22:335554&r=upt |
| By: | Patrick Gianfaldoni (LBNC - Laboratoire Biens, Normes, Contrats - AU - Avignon Université); Laurent Gardin (CRISS - Centre de Recherche Interdisciplinaire en Sciences de la Société - UPHF - Université Polytechnique Hauts-de-France); Florence Jany-Catrice (CLERSÉ - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019 - Université de Lille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | What socio-economic model(s) do associations, and more generally SSE actors, deploy? How do they balance their books? How do they keep the promises of virtue of the SSE (social utility, shared governance, interest in human, social and ecological matters) and ensure their economic sustainability? In other words, what meaning should be given to this notion of "SSE" in the diversity of interpretations it induces or suggests? |
| Abstract: | Quel(s) modèle(s) socio-économique(s) déploient les associations, et plus généralement les acteurs de l'ESS ? Comment font-ils pour équilibrer leurs comptes ? Pour tenir tout à la fois les promesses de vertu de l'ESS (utilité sociale, gouvernance partagée, intérêt pour les choses humaines, sociales et écologiques) et assurer leur pérennité économique ? En d'autres termes, quelle signification doit-on accorder à cette notion de « MSE » dans la diversité des interprétations qu'elle induit ou qu'elle suggère ? |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04111737&r=upt |
| By: | Hernaes, Erik (Ragnar Frisch Centre for Economic Research); Markussen, Simen (Ragnar Frisch Centre for Economic Research); Piggott, John (University of New South Wales); Røed, Knut (Ragnar Frisch Centre for Economic Research) |
| Abstract: | We evaluate a comprehensive reform of Norwegian early retirement institutions in 2011 through the lens of a parsimonious random utility choice model. The reform radically changed work incentives and/or pension access-age for some (but not all) workers. We find that improved work incentives caused employment to rise considerably, at the expense of both early retirement and exits through disability insurance. Lower access-age to own pension funds caused a small increase in employment and a large drop in disability program participation. Properly designed pension reforms thus need to take the interplay between old age pension and disability insurance programs into account. |
| Keywords: | pension reform, disability insurance, program substitution |
| JEL: | H55 J22 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16256&r=upt |
| By: | Luc Arrondel (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); Fabrice Etilé (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: | La psyché des individus est-elle susceptible de changer pendant les « crises » ? Ou inversement, pour paraphraser Stigler et Becker (1977), les préférences individuelles sont-elles « solides comme un roc », en d'autres termes, stables temporellement ? Même si théoriquement, les économistes privilégient la stabilité des préférences à l'instabilité, savoir si des « chocs », qu'ils soient démographiques, sanitaires, naturels, conflictuels ou économiques, sont susceptible de modifier les paramètres de goût des individus et en conséquence leurs comportements, est une question importante en matière de politique publique. De nombreux travaux empiriques cherchent aujourd'hui à tester si les préférences évoluent ou non dans le temps, ou encore si elles sont durablement modifiées par des événements de la vie ou des chocs structurels auxquels sont confrontés les individus. Les conclusions dépendent de l'origine des chocs, de la méthodologie adoptée pour mesurer les préférences et de la nature des questions posées. Le choc de la pandémie du Covid-19 de 2020 est une nouvelle opportunité pour étudier cette question de la stabilité des goûts. Il existe déjà de nombreuses études qui ont analysé l'impact de la crise du Covid sur les épargnants mais qui n'aboutissent à aucun consensus sur le sens de l'impact de la crise sanitaire sur les préférences. Pour la France, les traitements statistiques réalisés ici à partir de l'enquête Pat€r 2020 montrent plutôt une stabilité des préférences vis-à-vis du risque : le « grand confinement » n'aurait ainsi eu que peu d'impact sur les préférences de l'épargnant. |
| Keywords: | Préférence de l'épargnant, Aversion au risque, Choc, Demande d'actions |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-04075720&r=upt |
| By: | Kim, Hyunjung; Li, Tongzhe |
| Keywords: | Research Methods/Statistical Methods, Risk and Uncertainty, Institutional and Behavioral Economics |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea22:335905&r=upt |
| By: | Xiaoyue Li; John M. Mulvey |
| Abstract: | Optimal execution of a portfolio have been a challenging problem for institutional investors. Traders face the trade-off between average trading price and uncertainty, and traditional methods suffer from the curse of dimensionality. Here, we propose a four-step numerical framework for the optimal portfolio execution problem where multiple market regimes exist, with the underlying regime switching based on a Markov process. The market impact costs are modelled with a temporary part and a permanent part, where the former affects only the current trade while the latter persists. Our approach accepts impact cost functions in generic forms. First, we calculate the approximated orthogonal portfolios based on estimated impact cost functions; second, we employ dynamic program to learn the optimal selling schedule of each approximated orthogonal portfolio; third, weights of a neural network are pre-trained with the strategy suggested by previous step; last, we train the neural network to optimize on the original trading model. In our experiment of a 10-asset liquidation example with quadratic impact costs, the proposed combined method provides promising selling strategy for both CRRA (constant relative risk aversion) and mean-variance objectives. The running time is linear in the number of risky assets in the portfolio as well as in the number of trading periods. Possible improvements in running time are discussed for potential large-scale usages. |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2306.08809&r=upt |
| By: | Maćkowiak, Bartosz; Wiederholt, Mirko |
| Abstract: | We solve a real business cycle model with rational inattention (an RI-RBC model). In the RIRBC model, the growth rates of employment, investment, and output are about as persistent as in the data, with an amount of inattention consistent with survey data on expectations. Moreover, consumption, employment, and output move in the same direction in response to news about future productivity. By contrast, the baseline RBC model produces neither persistent growth rates nor business cycle comovement after news shocks. JEL Classification: D83, E32, E71 |
| Keywords: | information choice, news shocks, productivity shocks, rational inattention, real business cycle model |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232827&r=upt |
| By: | Renaud Fillieule (CLERSÉ - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019 - Université de Lille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | First in his paper «Utility Analysis and Interest» (1936) and then in two chapters of 'The Pure Theory of Capital' (1941), Hayek develops a model of the interest rate that combines productivity and time-preference in a graphical framework inspired by Fisher (1930). Hayek claims that his model supports a productivity explanation of interest, in which time preference plays no role at all or only a minor role. We show in this paper that the arguments he puts forward in favor of a productivity explanation do not prove his point at all, and that his neglect of the role of time preference remains therefore unjustified. The consequences for his model of fully taking time preference into account are then investigated. |
| Abstract: | D'abord dans son article "Utility Analysis and Interest" (1936) puis dans deux chapitres de 'The Pure Theory of Capital' (1941), Hayek développe un modèle du taux d'intérêt qui combine productivité et préférence temporelle dans un cadre graphique inspiré de Fisher (1930). Hayek affirme que son modèle va dans le sens d'une explication de l'intérêt par la productivité, dans laquelle la préférence temporelle ne joue aucun rôle ou seulement un rôle mineur. Nous montrons dans cet article que les arguments qu'il avance en faveur d'une explication par la productivité ne prouvent pas du tout son point de vue et que son rejet du rôle de la préférence temporelle reste donc injustifié. Nous étudions ensuite les conséquences pour son modèle d'une prise en compte adéquate de la préférence temporelle. |
| Date: | 2022–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04117743&r=upt |