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on Utility Models and Prospect Theory |
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Issue of 2023‒10‒09
fifteen papers chosen by |
| By: | Echenique, Federico; Imai, Taisuke; Saito, Kota |
| Abstract: | Abstract: We propose a new measure of deviations from expected utility theory. For any positive number e, we give a characterization of the datasets with a rationalization that is within e (in beliefs, utility, or perceived prices) of expected utility (EU) theory, under the assumption of risk aversion. The number e can then be used as a measure of how far the data is to EU theory. We apply our methodology to data from three large-scale experiments. Many subjects in these experiments are consistent with utility maximization, but not with EU maximization. Our measure of distance to expected utility is correlated with the subjects’ demographic characteristics. |
| Keywords: | Economics, Applied economics, Econometrics, Economic theory |
| Date: | 2023–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:econwp:qt8pt4287c&r=upt |
| By: | Yan Dolinsky; Or Zuk |
| Abstract: | In this work we consider the exponential utility maximization problem in the framework of semistatic hedging. |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2308.10550&r=upt |
| By: | René van den Brink (VU University Amsterdam and Tinbergen Institute); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne, 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: | This paper aims to connect the social network literature on centrality measures with the economic literature on von Neumann-Morgenstern expected utility functions using cooperative game theory. The social network literature studies various concepts of network centrality, such as degree, betweenness, connectedness, and so on. This resulted in a great number of network centrality measures, each measuring centrality in a different way. In this paper, we aim to explore which centrality measures can be supported as von Neumann-Morgenstern expected utility functions, reflecting preferences over different network positions in different networks. Besides standard axioms on lotteries and preference relations, we consider neutrality to ordinary risk. We show that this leads to a class of centrality measures that is fully determined by the degrees (i.e. the numbers of neighbours) of the positions in a network. Although this allows for externalities, in the sense that the preferences of a position might depend on the way how other positions are connected, these externalities can be taken into account only by considering the degrees of the network positions. Besides bilateral networks, we extend our result to general cooperative TU-games to give a utility foundation of a class of TU-game solutions containing the Shapley value. |
| Keywords: | weighted network, degree, centrality measure, externalities, neutrality to ordinary risk, expected utility function |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-04188289&r=upt |
| By: | Georg Menz; Moritz Vo{\ss} |
| Abstract: | We present a formal framework for the aggregation of financial markets mediated by arbitrage. Our main tool is to characterize markets via utility functions and to employ a one-to-one correspondence to limit order book states. Inspired by the theory of thermodynamics we argue that the arbitrage-mediated aggregation mechanism gives rise to a market-dynamical entropy, which quantifies the loss of liquidity caused by aggregation. We also discuss future directions of research in this emerging theory of market dynamics. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.04116&r=upt |
| By: | Hui Mi; Zuo Quan Xu; Dongfang Yang |
| Abstract: | This paper investigates an optimal investment problem under the tail Value at Risk (tail VaR, also known as expected shortfall, conditional VaR, average VaR) and portfolio insurance constraints confronted by a defined-contribution pension member. The member's aim is to maximize the expected utility from the terminal wealth exceeding the minimum guarantee by investing his wealth in a cash bond, an inflation-linked bond and a stock. Due to the presence of the tail VaR constraint, the problem cannot be tackled by standard control tools. We apply the Lagrange method along with quantile optimization techniques to solve the problem. Through delicate analysis, the optimal investment output in closed-form and optimal investment strategy are derived. A numerical analysis is also provided to show how the constraints impact the optimal investment output and strategy. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.01936&r=upt |
| By: | Claudia Kelsall (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier); Martin F Quaas (CAU - Christian-Albrechts-Universität zu Kiel); Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier) |
| Abstract: | We study optimal harvesting of a renewable resource with stochastic dynamics. To focus on the effect of risk aversion, we consider a resource user who is indifferent with respect to intertemporal variability. In this setting, a constant escapement strategy is optimal, i.e. the stock after optimal harvesting is constant. We find that under common specifications of risk aversion, increasing risk and risk aversion increase current resource use. We show that this is due to an investment effect, i.e. the resource user invests in risk free alternatives, rather than the risky resource stock. A quantitative application of the model for the Eastern Baltic cod fishery shows that risk and risk aversion can have a much larger effect on optimal harvesting than found in the previous literature. ✩ We thank Mickael Beaud, Mabel Tidball, Rudi Voss, Marc Willinger, the editor and two referees for helpful comments and suggestions. The authors acknowledge the ANR-DFG project CRaMoRes (Grant ANR-19-FRAL-0010-01 and DFG QU 357/14-1). C. Kelsall acknowledges the support of labEx CeMEB, an ANR ''Investissements d'avenir'' program (ANR-10-LABX-04-01). M. Quaas acknowledges funding by BMBF under grant 03F0876B. |
| Keywords: | Resource economics Investment under uncertainty Risk aversion Prudence Precautionary savings |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04190160&r=upt |
| By: | Masataka Eguchi; Yuhki Hosoya; Mai Yamada |
| Abstract: | It has been empirically observed that consumption responds positively to government spending shock, however, existing models with intertemporally-optimizing households do not easily reconcile this stylized fact. This paper aims to address this discrepancy between models and data, focusing on the non-separable preferences with respect to consumption, leisure, and government spending. We derive conditions for a positive consumption multiplier under the general utility function and find that consumption can respond positively when leisure and government spending are substitutes. Examples of government spending that would have such an effect include care for children and the elderly, education spending, highway and public transportation. |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1211&r=upt |
| By: | Sarah Auster; Christian Kellner |
| Abstract: | We study the effect of ambiguity on timing decisions. An agent faces a stopping problem with an uncertain stopping payoff and a stochastic time limit. The agent is unsure about the correct model quantifying the uncertainty and seeks to maximize her payoff guarantee over a set of plausible models. As time passes and the agent updates, the worst-case model used to evaluate a given strategy can change, creating a problem of dynamic inconsistency. We characterize the stopping behavior in this environment and show that, while the agent’s myopic incentives are fragile to small changes in the set of considered models, the best consistent plan from which no future self has incentives to deviate is robust. |
| Keywords: | Stopping problem, ambiguity, consistent planning |
| JEL: | C61 D81 D83 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_460&r=upt |
| By: | Fries, Tilman |
| Abstract: | This replication report examines and extends the research conducted by Butera, Metcalfe, Morrison, and Taubinsky (2022) on "The Welfare Effects of Pride and Shame." The original paper explores the welfare implications of public recognition as a motivator for desirable behavior and introduces an empirical methodology to measure Public Recognition Utility (PRU), which quantifies the utility individuals experience when their actions are publicly recognized. This report focuses on the real effort experiment reported in the paper that was conducted using a classroom sample, a lab sample, and an online sample. I computationally reproduce the original results and verify their robustness. While reproducing the results, I found two minor coding errors in the replication package. Correcting these errors slightly changes some estimates reported in the paper but does not turn over any results. The main treatment effect findings are further robust to using different sets of controls and sample selection criteria. Moreover, I conduct a heterogeneity analysis which reveals significant variations in how participants value public recognition. Overall, the replication study confirms the original conclusions while providing additional insights into the heterogeneity of PRU shapes on an individual level. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:i4rdps:64&r=upt |
| By: | Bertermann, Alexander; Kamhöfer, Daniel A.; Schildberg-Hörisch, Hannah |
| Abstract: | This paper investigates the causal effect of education on life satisfaction, exploring effect heterogeneity along employment status. We use exogenous variation in compulsory schooling requirements and the build-up of new, academically more demanding schools, shifting educational attainment along the entire distribution of schooling. Leveraging plant closures and longitudinal information, we also address the endogeneity of employment status. We find a positive effect of education on life satisfaction for employed individuals, but a negative one for those without a job. We propose an aspiration-augmented utility function as a unifying explanation for the asymmetric effect of education on life satisfaction. |
| Keywords: | Education, Life satisfaction, Employment status, Compulsory schooling reforms, School openings, Instrumental variable estimation |
| JEL: | I31 C26 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:406&r=upt |
| By: | Youngsoo Jang (University of Queensland); Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies) |
| Abstract: | How should we compare welfare across pension systems in presence of differential mortality? A commonly used standard utilitarian criterion implicitly favors the long-lived over the short-lived. We investigate under what conditions this ranking is reversed. We clearly distinguish between the redistribution along mortality and income dimensions, and thus between mortality and income progressivity. We show that when mortality is independent of income, mortality progressivity can be optimal only when (i) there is more aversion to inequality in lifetime utilities compared to aversion to consumption inequality, (ii) life is valuable. When the short-lived tend to have lower income, mortality progressivity can be also optimal when income redistribution tools are limited. In this case, mortality progressivity is used to substitute for income progressivity. |
| Keywords: | mortality-related redistribution, pensions, social security, annuities, life-cycle model |
| JEL: | G22 H21 H55 I38 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2023-023&r=upt |
| By: | Kamel Louhichi; Daël Merisier (UMR PSAE - Paris-Saclay Applied Economics - AgroParisTech - Université Paris-Saclay - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | This paper analyses the potential impacts of a hypothetical implementation of the Income Stabilisation Tool in France for the field crops sector. The IST is a risk management tool proposed within the CAP 2014-2020 to support farmers facing a severe drop in their incomes. This analysis was conducted using a farm-level model relying on expected utility theory and based on positive mathematical programming with risk. The model was applied to a sample of 1375 field crop farms in metropolitan France derived from FADN data. Simulation results show that the uptake rate of the tool is relatively low, less than 37% in all scenarios. It strongly depends on the CAP public support, the loss threshold triggering entitlement to the aid and the amount of premium paid by farmers. The highest rates are observed in large farms and farms located in regions highly exposed to climatic risks. Model results also show that the IST boost adopters' income. However, its impacts on crop diversity, measured by Shannon index, are negatives. |
| Keywords: | Agricultural risk management, Income Stabilisation Tool, Mutual Fund, Crop diversity, Farm-level Model, Common Agricultural Policy, France |
| Date: | 2023–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04195630&r=upt |
| By: | Luigi Mittone; Mauro Papi |
| Abstract: | Despite its importance, relatively little attention has been devoted to studying the effects of exposing individuals to digital choice interfaces. In two pre-registered lottery-choice experiments, we administer three information-search technologies that are based on well-known heuristics: in the ABS (alternative-based search) treatment, subjects explore outcomes and corresponding probabilities within lotteries; in the CBS (characteristic-based search) treatment, subjects explore outcomes and corresponding probabilities across lotteries; in the Baseline treatment, subjects view outcomes and corresponding probabilities all at once. We find that (i) when lottery outcomes comprise gains and losses (experiment 1), exposing subjects to the CBS technology systematically makes them choose safer lotteries, compared to the subjects that are exposed to the other technologies, and (ii) when lottery outcomes comprise gains only (experiment 2), the above results are reversed: exposing subjects to the CBS technology systematically makes them choose riskier lotteries. By combining the information-search and choice analysis, we offer an interpretation of our results that is based on prospect theory, whereby the information-search technology subjects are exposed to contributes to determine the level of attention that the lottery attributes receive, which in turn has an effect on the reference point. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.01495&r=upt |
| By: | Shuguang Jiang; Marie Claire Villeval (GATE - GATE - GATE - Groupe d'Analyse et de Théorie Economique -UMR5824) |
| Abstract: | We investigated lying as a collective‐risk social dilemma. Misreporting resulted in increased individual earnings but when total claims reached a certain threshold, all group members were at risk of collective sanction, regardless of their individual behavior. Due to selfishness and miscoordination, most individuals earned less than the reservation payoff from honest reporting in the group. However, preferences for truth‐telling lowered the risk of collective sanction in this setting compared to a social dilemma game in which players could make direct claims without lying. The risk of sanctions decreased with risk aversion and a smaller group size. |
| Keywords: | Dishonesty, Collective Risk, Public Bad, Group Size, Individualism, D01 |
| Date: | 2023–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04199012&r=upt |
| By: | Fatemeh Nazari; Yellitza Soto; Mohamadhossein Noruzoliaee |
| Abstract: | Transportation systems will be likely transformed by the emergence of automated vehicles (AVs) promising for safe, convenient, and efficient mobility, especially if used in shared systems (shared AV or SAV). However, the potential tendency is observed towards owning AV as a private asset rather than using SAV. This calls for a research on investigating individuals' attitude towards AV in comparison with SAV to recognize the barriers to the public's tendency towards SAV. To do so, the present study proposes a modeling framework based on the theories in behavioral psychology to explain individuals' preference for owning AV over using SAV, built as a latent (subjective) psychometric construct, by three groups of explanatory latent constructs including: (i) desire for searching for benefits, i.e., extrinsic motive manifested in utilitarian beliefs; (ii) tendency towards seeking pleasure and joy, i.e., intrinsic motive reflected in hedonic beliefs; and (iii) attitude towards three configurations of shared mobility, i.e., experience with car and ridesharing, bikesharing, and public transit. Estimated on a sample dataset from the State of California, the findings can shed initial lights on the psychological determinants of the public's attitude towards owning AV versus using SAV, which can furthermore provide policy implications intriguing for policy makers and stakeholders. Of note, the findings reveal the strongest influential factor on preference for AV over SAV as hedonic beliefs reflected in perceived enjoyment. This preference is next affected by utilitarian beliefs, particularly perceived benefit and trust of stranger, followed by attitude towards car and ride sharing. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.03283&r=upt |