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on Utility Models and Prospect Theory |
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Issue of 2023‒10‒16
thirteen papers chosen by |
| By: | Cheng, jinjun; dian, cheng |
| Abstract: | "Das Kapital" points out that commoditieshave two attributes of value and use value at the same time, and describe both qualitatively rather than quantitatively. Theutility of commodities fundamentally comes from thefunctional attributes of natural things, and must rely on theuse value of commodities to play its role. People's behaviorof buying goods is based on the evaluation of the utility ofgoods when making the decision to buy goods. The processof evaluating the utility of a commodity when making adecision to buy it is essentially a process of comparing theirlabor efforts and obtaining happiness in their heart. Theequation of utility is: U= (1 / P) (Pm / W); the unit ofmeasurement is named "Om" (symbol in Sanskrit ॐ), is thereciprocal of the monetary unit "Tarrant" (symbol).Commodity utility theory of value and commodity labortheory of value are unified through the utility equation. |
| Date: | 2023–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:5t2hg&r=upt |
| By: | Sven Neth |
| Abstract: | Is more information always better? Or are there some situations in which more information can make us worse off? Good (1966) argues that expected utility maximizers should always accept more information if the information is cost-free and relevant. But Good's argument presupposes that you are certain you will update by conditionalization. If we relax this assumption and allow agents to be uncertain about updating, these agents can be rationally required to reject free and relevant information. Since there are good reasons to be uncertain about updating, rationality can require you to prefer ignorance. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.12374&r=upt |
| By: | Mohammed Kaddouhah (School of Management, Swansea University) |
| Abstract: | This research note proposes an economic definition of the popular phenomenon of Fear of Missing Out (FOMO). Our definition assumes that FOMO causes individuals to base their decision-making utility on their own anticipated regret and the decisions made by individuals in their social peer group. We use an example to illustrate how to analyse decision-making under FOMO preferences and to highlight differences with the concept of regret aversion. |
| Keywords: | anticipated regret, Fear of Missing Out, FOMO, financial decision making |
| JEL: | D81 D91 G11 |
| Date: | 2023–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:swn:wpaper:2023-01&r=upt |
| By: | Zhou Yang; Junkee Jeon |
| Abstract: | In this paper, we undertake an investigation into the utility maximization problem faced by an economic agent who possesses the option to switch jobs, within a scenario featuring the presence of a mandatory retirement date. The agent needs to consider not only optimal consumption and investment but also the decision regarding optimal job-switching. Therefore, the utility maximization encompasses features of both optimal switching and stochastic control within a finite horizon. To address this challenge, we employ a dual-martingale approach to derive the dual problem defined as a finite-horizon pure optimal switching problem. By applying a theory of the double obstacle problem with non-standard arguments, we examine the analytical properties of the system of parabolic variational inequalities arising from the optimal switching problem, including those of its two free boundaries. Based on these analytical properties, we establish a duality theorem and characterize the optimal job-switching strategy in terms of time-varying wealth boundaries. Furthermore, we derive integral equation representations satisfied by the optimal strategies and provide numerical results based on these representations. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.12588&r=upt |
| By: | Atilla Aras |
| Abstract: | Constructing theorems can help to determine the shape of certain utility curves that make up the new definitions in financial markets. The aim of this study was to present proofs for these theorems. Although the terms of risk-averse, risk-loving, and risk-neutral are equivalent to strict concavity, strict convexity, and linearity, respectively, in standard theory, certain new definitions satisfy strict concavity or strict convexity, or linearity. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.03003&r=upt |
| By: | Skjold, Benjamin; Steinkamp, Simon Richard; Hulme, Oliver J; Peters, Ole; Connaughton, Colm |
| Abstract: | Decision theories commonly assume that risk preferences are idiosyncratic but stable over time. A recent model from ergodicity economics reveals that optimising the growth rate of wealth requires individuals to adjust their risk preferences to wealth dynamics. Here we ask whether humans are capable of such adjustments. In a randomised control trial, participants will make risky decisions under additive and multiplicative dynamics. We will estimate risk preferences separately in the two conditions for each participant by fitting isoelastic utility functions via hierarchical Bayesian models and standard regression techniques. Growth optimal adjustments to risk preferences would confirm our main hypothesis, whereas risk preferences that are stable across conditions would disconfirm it. Pilot data from 11 participants revealed strong evidence supporting the main hypothesis. We will replicate this pilot in a pre-registered experiment with up to 150 participants. |
| Date: | 2023–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:ew2sx&r=upt |
| By: | Miles S. Kimball; Robert J. Willis |
| Abstract: | Psychologists have developed effective survey methods of measuring how happy people feel at a given time. The relationship between how happy a person feels and utility is an unresolved question. Existing work in Economics either ignores happiness data or assumes that felt happiness is more or less the same thing as flow utility. The approach we propose in this paper steers a middle course between the two polar views that “happiness is irrelevant to Economics” and the view that “happiness is a sufficient statistic for utility.” We argue that felt happiness is not the same thing as flow utility, but that it does have a systematic relationship to utility. In particular, we propose that happiness is the sum of two components: (1) elation–or short-run happiness–which depends on recent news about lifetime utility and (2) baseline mood–or long-run happiness–which is a subutility function much like health, entertainment, or nutrition. In principle, all of the usual techniques of price theory apply to baseline mood, but the application of those techniques is complicated by the fact that many people may not know the true household production function for baseline mood. If this theory is on target, there are two reasons data on felt happiness is important for Economics. First, short-run happiness in response to news can give important information about preferences. Second, long-run happiness is important for economic welfare in the same way as other higher-order goods such as health, entertainment, or nutrition. |
| JEL: | D60 D90 D91 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31707&r=upt |
| By: | Rafi, Arafat Hossain; Jeba, Jebunnesa; tabssum, Tasnim; Khan, Abdul Mahidud |
| Abstract: | Today employees compete for qualified individuals and try to reduce employee turnover as a profit maximizing condition. That is why a proper understanding of employees' demands, including and beyond wage, is critical. The paper examines how various job attributes affect university students’ utility and their tendencies to choose different types of jobs. This study adopted the Discrete Choice Experiment (DCE) to find the Willingness to accept (WTA) among 213 students of Bangladesh University of Professionals (BUP). This study identified four essential job attributes such as monthly wage, job security, working hours and the opportunity of using the knowledge or skills they gained during their bachelor’s or masters and quantify the tradeoff preference among these four attributes. The paper finds that students prefer the public job sector more than the private job, entrepreneurship, and higher study. Having job security increases their utility by 35.8 percent and they require an amount of 16 thousand taka in the absence of job security. Working for long hours such as 46-60 hours and 61-75 hours decreases their utility by 39 percent and 25.2 percent respectively. Moreover, Female students are required more compensation than males for longer working hours whereas male students put more value on high wages. |
| Keywords: | Utility, Preference, Attributes, Discrete Choice Experiment |
| JEL: | D11 D70 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118424&r=upt |
| By: | Giulia Piccillo; Poramapa Poonpakdee |
| Abstract: | This paper investigates the effects of uncertainty on the macro economy by replicating its micro effects on individual subjective beliefs. In our model, the representative household has smooth ambiguity preferences and is uncertain about which scenario the economy will be in the next period: normal growth or recession. We anchor the ratio of expected utilities between the two scenarios through the empirical macroeconomic uncertainty index. The higher the macroeconomic uncertainty is, the deeper the recession that the household is expecting. Our estimations demonstrate that the smooth ambiguity model with an appropriate level of ambiguity aversion outperforms the benchmark model with no uncertainty in fitting the US output growth rate, especially during recessions. This holds true even when tested with out-of-sample forecasts. Our analyses show that the effect of uncertainty on the representative household’s beliefs aligns with the corresponding empirical literature. Moreover, the Global Financial Crisis was associated with an increase in both risk aversion and ambiguity aversion, while the Dot-com Crisis only affected risk aversion. |
| Keywords: | behavioural macro, uncertainty, estimated DSGE models |
| JEL: | E70 D80 D90 E10 E30 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10646&r=upt |
| By: | Aras, Atilla |
| Abstract: | Constructing theorems can help to determine the shape of certain utility curves that make up the new definitions in financial markets. The aim of this study was to present proofs for these theorems. Although the terms “risk-averse, ” “risk-loving, ” and “risk-neutral” are equivalent to “strict concavity, ” “strict convexity, ” and “linearity, ” respectively, in standard theory, certain new definitions satisfy strict concavity or strict convexity, or linearity. |
| Date: | 2023–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:yac7z&r=upt |
| By: | Lambrecht, Marco; Oechssler, Jörg; Weidenholzer, Simon |
| Abstract: | Robo-advisors are novel tools in financial markets that provide investors with low-cost financial advice, usually based on individual characteristics like risk attitudes. In a portfolio choice experiment running over 10 weeks, we study how much investors benefit from robo advice. We also study whether robos increase financial market participation. The treatments are whether investors just receive advice, have a robo making all decisions for them, or have to trade on their own. We find no effect on initial market participation. But robos help investors to avoid mistakes, make rebalancing more frequent, and overall yield portfolios much closer to the utility maximizing ones. Robo-advisors that implement the recommendations by default do significantly better than those that just give advice. |
| Keywords: | algorithmic trading; experiment; financial markets |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0734&r=upt |
| By: | Francesco Jacopo Pintus (University of Padova) |
| Abstract: | Drawing upon an extensive body of valuation literature focused on water quality, I conduct a meta-analysis benefit transfer exercise with the aim of quantifying the Willingness to Pay (WTP) for an enhancement in drinking water quality among households directly exposed to Perfluoroalkyl Substances (PFAS) over recent decades in Italy. My analysis comprises a metadata compilation encompassing 72 WTP estimates extracted from 39 previous valuation studies conducted in advanced economies. The transfer of values is realized estimating a meta regression model (MRM) which includes both study design and socio-economic explanatory variables, according to the Weak Structural Utility Theoretic approach. To determine the most suitable MRM specification, I engage in a comparative evaluation of various model configurations, assessing their predictive performance in terms of transfer errors and explanatory capability. The mean transfer error and the adjusted R-squared of the preferred MRM are in line with previous published meta-analysis and equal respectively to 0.665 and 0.607. Furthermore, the parameters estimated within the model align with both intuitive expectations and economic theory. As a result of the benefit transfer process, I estimate an annual WTP of e250.80 per household for improved drinking water quality within the PFAS-affected area, and an aggregate value of social benefits from PFAS decontamination of around e12 million. |
| Keywords: | WTP; Meta-Analysis; Benefit Transfer; PFAS; Drinking Water. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0308&r=upt |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | Quantitative probability in the subjective theory is assumed to be finitely additive and defined on all the subsets of an underlying state space. Functions from this space into an Euclidian n-space create a new probability space for each such function. We point out that the associated probability measures, induced by the subjective probability, on these new spaces can not be finitely additive and defined on all the subsets of Euclidian n-space, for n ≥ 3. This is a consequence of the Banach-Tarski paradox. In the paper we show that subjective probability theory, including Savage’s theory of choice, can be reformulated to take this, and similar objections into account. We suggest such a reformulation which, among other things, amounts to adding an axiom to Savage’s seven postulates, and then use a version of Carathéodory’s extension theorem. |
| Keywords: | The Banach-Tarski paradox; the axiom of choice; Savage’s theory of choice; monotone continuity; countable additivity; Carathéodory’s extension theorem; syndicates; contingent claims |
| JEL: | C00 C10 C25 G10 G12 G13 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2023_015&r=upt |