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on Utility Models and Prospect Theory |
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Issue of 2023‒10‒30
eleven papers chosen by |
| By: | GC, Arun |
| Abstract: | Utility theory is a pivotal concept in economics that provides insights into how an individual is motivated to act under budget constraints. The main assumption of this theory and the entire field of economics is that a rational human being and an individual derive utility from the consumption of goods and services under given budget constraints. The aim of this article is to explore these fundamental assumptions and introduce a new theoretical framework for deriving utility, which is termed the “utility of sacrifices”. Various methods were employed in the study, including a review of existing literature, an analysis of prevailing theories, and observations in real-world scenarios. The results show that, through observations, a “rational” human being derives utility from both consumption and voluntary sacrifices. Therefore, in conclusion, it is proposed that the total utility of an individual is the sum of these two components. This theoretical framework provides a more comprehensive understanding of human decision-making and behavior in economics. It also provides novel insights for future research and applications in economics. |
| Keywords: | utility; consumption; sacrifices; decision making; behavior |
| JEL: | B41 B5 B50 D1 D11 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118442&r=upt |
| By: | Stark, Oded |
| Abstract: | I study attitudes towards risk taking in cases where a person relates to others positively, namely altruistically. This study is needed because it is unclear how altruism influences the inclination of an altruistic person to take risks. Will this person’s risk-taking behavior differ if the utility of another person does not enter his utility function? Does being altruistic cause a person to become more reluctant to take risks because a risky undertaking turning sour will also damage his ability to make altruistic transfers? Or does altruism induce a person to resort to risky behavior because the reward for a successful outcome is amplified by the outcome facilitating a bigger transfer to the beneficiary of the altruistic act? Specifically, holding constant other variables, I ask: is an altruistic person more risk averse or less risk averse than a comparable person who is not altruistic? In response to this question, using a simple model in which preferences are represented by a logarithmic utility function, I show that an altruistic person who is an active donor (benefactor) is less risk averse than a comparable person who is not altruistic: altruism is a cause of greater willingness to take risks. The finding that the altruism trait causes greater willingness to take risks has not previously been noted in the existing literature. |
| Keywords: | Risk and Uncertainty |
| Date: | 2023–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ubzefd:338674&r=upt |
| By: | Andrea La Nauze; Erica Myers |
| Abstract: | We use an experiment to test whether consumers optimally acquire information on energy costs in appliance markets where, like many contexts, consumers are poorly informed and make mistakes despite freely-available information. We find consumers acquire information suboptimally; there is little correlation between the revealed utility gain from improved decision making due to information and willingness to pay for information. We compare two behavioral interventions to address consumer mistakes: a conventional subsidy for energy-efficient products and a non-traditional subsidy paying consumers to view information on energy costs. We show that paying for attention can target welfare improvements more effectively. |
| JEL: | D12 D83 D91 Q41 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31742&r=upt |
| By: | Daisuke Matsuzaki; Yoshiyasu Ono |
| Abstract: | When confronting economic stagnation, innovation (product innovation in particular) is often cited as an effective stimulus because it is assumed to encourage household consumption and lead to higher demand. Using a secular stagnation model with wealth preference, we examine the effects of product innovation on employment and consumption. This study examines three types of product innovation, including quantity-augmenting-like innovation, addictive innovation, and variety expansion. The first works as if a larger quantity were consumed although the actual quantity remains the same, the second reduces the elasticity of the marginal utility of consumption, and the third increases the variety of consumption commodities. We find that the first and third reduce both consumption and employment, whereas the second expands them. It suggests that policy makers should carefully choose the type of product innovation to promote as an economic stimulus: addictive innovation stimulates business activity whereas quantity-augmenting-like innovation and variety expansion worsen stagnation. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1204rr&r=upt |
| By: | Klaus Schmidt (LMU Munich); Jonas von Wangenheim (University of Bonn) |
| Abstract: | Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities. |
| Keywords: | organizational change; productivity; reference points; loss aversion; social preferences; |
| JEL: | D23 D91 L2 |
| Date: | 2023–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:430&r=upt |
| By: | Acquatella, Angélique |
| Abstract: | Low-income individuals are typically the most price sensitive segment of the mar-ket, but this is not true in the market for health care services. I show that low-income individuals have a smaller demand elasticity of medical spending with re-spect to coinsurance, relative to their higher income counterparts, using data from the RAND Health Insurance experiment. The null effect is driven by disproportion-ate share of low-income individuals who consume zero health care. The key insight is that low-income individuals may optimally consume zero health care because, when marginal utility of consumption is high, forgoing non-medical consumption becomes very costly. |
| Keywords: | income effects; health care demand elasticity; corner solution |
| JEL: | I12 I14 D11 |
| Date: | 2023–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:128561&r=upt |
| By: | Benjamin Enke; Cassidy Shubatt |
| Abstract: | We develop interpretable, quantitative indices of the objective and subjective complexity of lottery choice problems that can be computed for any standard dataset. These indices capture the predicted error rate in identifying the lottery with the highest expected value, where the predictions are computed as convex combinations of choice set features. The most important complexity feature in the indices is a measure of the excess dissimilarity of the cumulative distribution functions of the lotteries in the set. Using our complexity indices, we study behavioral responses to complexity out-of-sample across one million decisions in 11, 000 unique experimental choice problems. Complexity makes choices substantially noisier, which can generate systematic biases in revealed preference measures such as spurious risk aversion. These effects are very large, to the degree that complexity explains a larger fraction of estimated choice errors than proximity to indifference. Accounting for complexity in structural estimations improves model fit substantially. |
| Keywords: | complexity, choice under risk, cognitive uncertainty, experiments |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10644&r=upt |
| By: | Erhardt, Klaudia |
| Abstract: | NEPS-Metafile.do is a Stata program that generates a Stata file containing information on every variable of the NEPS Scientific Use Files. This paper documents the indicators and characteristics that are extracted from the source files and gives detailed instructions on how to apply NEPSMetafile.do. Using the resulting metafile is demonstrated by extensive syntax examples. The complete syntax of NEPS-Metafile.do is included in the appendix and can also be downloaded (see link below). |
| Keywords: | NEPS Scientific Use Files, metafile, data management utility, Stata syntax |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbnep:spi2023501&r=upt |
| By: | Arnon Archankul; Giorgio Ferrari; Tobias Hellmann; Jacco J. J. Thijssen |
| Abstract: | We consider a singular control model of cash reserve management, driven by a diffusion under ambiguity. The manager is assumed to have maxmin preferences over a set of priors characterized by $\kappa$-ignorance. A verification theorem is established to determine the firm's cost function and the optimal cash policy; the latter taking the form of a control barrier policy. In a model driven by arithmetic Brownian motion, we numerically show that an increase in ambiguity leads to higher expected costs under the worst-case prior and a narrower inaction region. The latter effect can be used to provide an ambiguity-driven explanation for observed cash management behavior. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.12014&r=upt |
| By: | Leonardo Bursztyn (University of Chicago and NBER); (University of California Berkeley and NBER); Rafael Jiménez Durán (Bocconi University and Chicago Booth Stigler Center); Christopher Roth (University of Cologne, Max Planck Institute for Collective Goods, briq, CESifo, and CEPR) |
| Abstract: | Individuals might experience negative utility from not consuming a popular product. For example, being inactive on social media can lead to social exclusion or not owning luxury brands can be associated with having a low social status. We show that, in the presence of such spillovers to non-users, standard measures that take aggregate consumption as given fail to appropriately capture welfare. We propose a new methodology to measure welfare that accounts for these consumption spillovers, which we apply to estimate the consumer surplus of two popular social media platforms, TikTok and Instagram. In large-scale, incentivized experiments with college students, we show that, while the standard welfare measure suggests a large and positive surplus, our measure accounting for consumption spillovers indicates a negative surplus, with a large share of active users deriving negative utility. We also shed light on the drivers of consumption spillovers to non-users in the case of social media and show that, in this setting, the “fear of missing out” plays an important role. Our framework and estimates highlight the possibility of product market traps, where large shares of consumers are trapped in an inefficient equilibrium and would prefer the product not to exist. |
| Keywords: | Welfare; Consumption Spillovers; Collective Trap; Coordination; Product Market Traps; Social Media. |
| JEL: | D83 D91 P16 J15 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:260&r=upt |
| By: | Boxiang Fu |
| Abstract: | Most modern ticketing systems rely on a first-come-first-serve or randomized allocation system to determine the allocation of tickets. Such systems has received considerable backlash in recent years due to its inequitable allotment and allocative inefficiency. We analyze a ticketing protocol based on a variation of the marginal price auction system. Users submit bids to the protocol based on their own utilities. The protocol awards tickets to the highest bidders and determines the final ticket price paid by all bidders using the lowest winning submitted bid. Game theoretic proof is provided to ensure the protocol more efficiently allocates the tickets to the bidders with the highest utilities. We also prove that the protocol extracts more economic rents for the event organizers and the non-optimality of ticket scalping under time-invariant bidder utilities. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.11189&r=upt |