
on Utility Models and Prospect Theory 
By:  Jacob K Goeree; Bernardo GarciaPola 
Abstract:  In economics, risk aversion is modeled via a concave Bernoulli utility within the expectedutility paradigm. We propose a simple test of expected utility and concavity. We find little support for either: only 30 percent of the choices are consistent with a concave utility, only two out of 72 subjects are consistent with expected utility, and only one of them fits the economic model of risk aversion. Our findings contrast with the preponderance of seemingly "riskaverse" choices that have been elicited using the popular multipleprice list methodology, a result we replicate in this paper. We demonstrate that this methodology is unfit to measure risk aversion, and that the high prevalence of risk aversion it produces is due to parametric misspecification. 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.02083&r=upt 
By:  Gianluca Cassese 
Abstract:  We obtain an elementary characterization of expected utility based on a representation of choice in terms of psychological gambles, which requires no assumption other than coherence between exante and expost preferences. Weaker version of coherence are associated with various attitudes towards complexity and lead to a characterization of minimax or Choquet expected utility. 
Date:  2023–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2307.10328&r=upt 
By:  Sanjit Dhami; Narges Hajimoladarvish; Konstantinos Georgalos 
Abstract:  We consider a simple, two period, consumptionsavings model with future income uncertainty that examines the interplay of savings, precautionary savings, loss aversion, and risk. We provide the relevant theory, followed by empirical tests based on subjectspecific choices, and the measurement of subjectspecific behavioral parameters such as loss aversion and present bias. We predict, and show empirically, that loss aversion reduces savings, and that those who are more loss averse are less likely to engage in precautionary savings. Presentbias reduces savings. We also show that decision makers save more in response to a mean preserving spread of future random incomes, and this response is strengthened by loss aversion. We term this as the loss aversionhedging motive. 
Keywords:  income uncertainty, precautionary savings, loss aversion, loss aversionhedging 
JEL:  D01 D91 
Date:  2023 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_10570&r=upt 
By:  Abdelali Gabih; Ralf Wunderlich 
Abstract:  This paper investigates the optimal selection of portfolios for power utility maximizing investors in a financial market where stock returns depend on a hidden Gaussian mean reverting drift process. Information on the drift is obtained from returns and expert opinions in the form of noisy signals about the current state of the drift arriving randomly over time. The arrival dates are modeled as the jump times of a homogeneous Poisson process. Applying Kalman filter techniques we derive estimates of the hidden drift which are described by the conditional mean and covariance of the drift given the observations. The utility maximization problem is solved with dynamic programming methods. We derive the associated dynamic programming equation and study regularization arguments for a rigorous mathematical justification. 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.02049&r=upt 
By:  Nicholas C. Bedard; Jacob K. Goeree 
Abstract:  We establish the Subgradient Theorem for monotone correspondences  a monotone correspondence is equal to the subdifferential of a potential if and only if it is conservative, i.e. its integral along a closed path vanishes irrespective of the selection from the correspondence along the path. We prove two attendant results: the Potential Theorem, whereby a conservative monotone correspondence can be integrated up to a potential, and the Duality Theorem, whereby the potential has a Fenchel dual whose subdifferential is another conservative monotone correspondence. We use these results to reinterpret and extend Baldwin and Klemperer's (2019) characterization of demand in economies with indivisible goods. We introduce a simple test for existence of Walrasian equilibrium in quasilinear economies. Fenchel's Duality Theorem implies this test is met when the aggregate utility is concave, which is not necessarily the case with indivisible goods even if all consumers have concave utilities. 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.04593&r=upt 
By:  Sun, Tianyu; Tian, Liu 
Abstract:  Demand saturation occurs along with economic development, but the theoretical basis for demand saturation is lacking. This study adds to literature by proposing a novel concept named utilization cost, which denotes the physical or mental burden incurred to obtain utility. Correspondingly, we distinguish between quantity and quality of consumption and construct a general utility function. With a generative decision procedure, the analysis shows that utilization costs help to explain the economic dynamics across development stages in terms of demand saturation. And, the longterm state of demand is affected by the properties of utilization costs, determining development directions. 
Keywords:  Demand saturation; Consumption; Economic growth 
JEL:  D11 E10 O30 O40 
Date:  2023–07–01 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:118081&r=upt 
By:  Takao Asano (Okayama University); Xiaojing Cai (Okayama University); Ryuta Sakemoto (Okayama University) 
Abstract:  This study investigates how ambiguity has driven output and inflation in the U.S. over the past 70 years. We adopt the recently developed techniques that disentangle ambiguity from risk and assess the responses of output and inflation to ambiguity shocks. We observe that an increase in ambiguity led to an increase in output during high inflation periods, indicating the ambiguity lover behavior. We also uncover that ambiguity and risk estimated by realized volatility have the opposite impacts on business cycles, which is consistent with the prevailing asset pricing literature. 
Keywords:  Ambiguity, Risk premiums, Uncertainty, TVPVAR 
JEL:  E32 E44 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:kyo:wpaper:1094&r=upt 
By:  Haoyang Yu; Yutong Sun; Yulin Liu; Luyao Zhang 
Abstract:  Historically, gold and silver have played distinct roles in traditional monetary systems. While gold has primarily been revered as a superior store of value, prompting individuals to hoard it, silver has commonly been used as a medium of exchange. As the financial world evolves, the emergence of cryptocurrencies has introduced a new paradigm of value and exchange. However, the storeofvalue characteristic of these digital assets remains largely uncharted. Charlie Lee, the founder of Litecoin, once likened Bitcoin to gold and Litecoin to silver. To validate this analogy, our study employs several metrics, including unspent transaction outputs (UTXO), spent transaction outputs (STXO), Weighted Average Lifespan (WAL), CoinDaysDestroyed (CDD), and public onchain transaction data. Furthermore, we've devised trading strategies centered around the PricetoUtility (PU) ratio, offering a fresh perspective on cryptoasset valuation beyond traditional utilities. Our backtesting results not only display trading indicators for both Bitcoin and Litecoin but also substantiate Lee's metaphor, underscoring Bitcoin's superior storeofvalue proposition relative to Litecoin. We anticipate that our findings will drive further exploration into the valuation of crypto assets. For enhanced transparency and to promote future research, we've made our datasets available on Harvard Dataverse and shared our Python code on GitHub as open source. 
Date:  2023–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.00013&r=upt 
By:  Charles F. Manski; Aleksey Tetenov 
Abstract:  The statistical decision theory pioneered by Wald (1950) has used statedependent mean loss (risk) to measure the performance of statistical decision functions across potential samples. We think it evident that evaluation of performance should respect stochastic dominance, but we do not see a compelling reason to focus exclusively on mean loss. We think it instructive to also measure performance by other functionals that respect stochastic dominance, such as quantiles of the distribution of loss. This paper develops general principles and illustrative applications for statistical decision theory respecting stochastic dominance. We modify the Wald definition of admissibility to an analogous concept of stochastic dominance (SD) admissibility, which uses stochastic dominance rather than mean sampling performance to compare alternative decision rules. We study SD admissibility in two relatively simple classes of decision problems that arise in treatment choice. We reevaluate the relationship between the MLE, JamesStein, and JamesStein positive part estimators from the perspective of SD admissibility. We consider alternative criteria for choice among SDadmissible rules. We juxtapose traditional criteria based on risk, regret, or Bayes risk with analogous ones based on quantiles of statedependent sampling distributions or the Bayes distribution of loss. 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.05171&r=upt 
By:  Tobias Schütze; Carsten Spitzer; Philipp C. Wichardt; Philipp Christoph Wichardt 
Abstract:  Is being informed about nudging detrimental to the effect of the nudge? This paper reports results from an experimental study (n = 623) testing the effects of transparency on the effectiveness of a default nudge while controlling for reactance and decision time. Overall, the data show that more people follow the default if the nudge is made transparent. More importantly, though, effects of transparency differ depending on whether people are fast or slow in their decision making. In particular, (only) slow decision makers react more positively (keeping the default) if nudging is made transparent. Moreover, the data also show an interaction of reactance and decision time in that more reactant subjects making slower decisions respond more negatively (i.e. leave the default more often). Thus, a positive effect of transparency as well as a negative impact of reactance can be established in the data if decision time is accounted for. 
Keywords:  nudging, transparency, reactance, decision time 
JEL:  C90 D90 D91 
Date:  2023 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_10599&r=upt 
By:  Robert P. Gilles; Lina Mallozzi 
Abstract:  We introduce a new network centrality measure founded on the Gately value for cooperative games with transferable utilities. A directed network is interpreted as representing control or authority relations between playersconstituting a hierarchical network. The power distribution of a hierarchical network can be represented through a TUgame. We investigate the properties of this TUrepresentation and investigate the Gately value of the TUrepresentation resulting in the Gately power measure. We establish when the Gately measure is a Core power gauge, investigate the relationship of the Gately with the $\beta$measure, and construct an axiomatisation of the Gately measure. 
Date:  2023–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2308.02274&r=upt 