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on Utility Models and Prospect Theory |
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Issue of 2023‒11‒06
eighteen papers chosen by |
| By: | Rene’ van den Brink (Vrije Universiteit Amsterdam); Agnieszka Rusinowska (University Paris 1 Pantheon-Sorbonne) |
| 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 |
| JEL: | D85 D81 C02 |
| Date: | 2023–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20230061&r=upt |
| By: | Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg) |
| Abstract: | The present paper analyzes optimal redistributive income taxation in a Mirrleesian framework extended with other-regarding preferences at the individual level. We start by developing a general model where the other-regarding preference component of the utility functions is formulated to encompass almost any form of preferences for other people’s disposable income, and then continue with four prominent special cases. Two of these reflect self-centered inequality aversion, based on Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), whereas the other two reflect non-self-centered inequality aversion, where people have preferences for a low Gini coefficient and a high minimum income level in society, respectively. We find that other-regarding preferences may substantially increase the marginal tax rates, including the top rates, and that different types of other-regarding preferences have very different implications for optimal taxation. |
| Keywords: | Optimal Taxation; Redistribution; Social Preferences; Inequality Aversion |
| JEL: | D62 D90 H21 H23 |
| Date: | 2023–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:1016&r=upt |
| By: | André de Palma; Karim Kilani (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper builds upon the work of Professor Marley, who, since the beginning of his long research career, has proposed rigorous axiomatics in the area of probabilistic choice models. Our study concentrates on models that can be applied to best and worst choice scaling experiments. We focus on those among these models that are based on strong assumptions about the underlying ranking of the alternatives with which the individual is assumed to be endowed when making the choice. Taking advantage of an inclusion-exclusion identity that we showed a few years ago, we propose a variety of best-worst choice probability models that could be implemented in software packages that are flourishing in this field. |
| Keywords: | Best-worst scaling experiments; Logit model; Random utility models; Reverse logit model |
| JEL: | C25 C35 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2023-16&r=upt |
| By: | Fabio Maccheroni; Massimo Marinacci; Ruodu Wang; Qinyu Wu |
| Abstract: | We provide a new foundation of risk aversion by showing that the propension to exploit insurance opportunities fully describes this attitude. Our foundation, which applies to any probabilistically sophisticated preference, well accords with the commonly held prudential interpretation of risk aversion that dates back to the seminal works of Arrow (1963) and Pratt (1964). In our main results, we first characterize the Arrow-Pratt risk aversion in terms of propension to full insurance and the stronger notion of risk aversion of Rothschild and Stiglitz (1970) in terms of propension to partial insurance. We then extend the analysis to comparative risk aversion by showing that the notion of Yaari (1969) corresponds to comparative propension to full insurance, while the stronger notion of Ross (1981) corresponds to comparative propension to partial insurance. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.09173&r=upt |
| By: | Cetin, Sefane (Université catholique de Louvain); Jousten, Alain (University of Liège) |
| Abstract: | This paper investigates the retirement patterns of married couples in Belgium. To forecast retirement behavior, we use administrative Social Security data from 2003 to 2017 and a discrete choice random utility model. In particular, we concentrate on the spousal bonus of pension payments to comprehend how financial incentives resulting from the social security system's structural design affect both partners' retirement decisions. We simulate the effect of the elimination of the spousal bonus and find that a small portion of women delay their retirement whereas the rest substitute into alternative social security benefits. Our results do not only highlight the significance of cross-program spillovers between various Social Security benefits, but also the heterogeneity in preferences for retirement and asymmetry of retirement behavior between husbands and wives. |
| Keywords: | old-age labor supply, retirement incentives, spousal bonus, pension reforms |
| JEL: | D10 H55 J26 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16470&r=upt |
| By: | Banerjee, Sreoshi |
| Abstract: | Sequencing deals with the problem of assigning slots to agents who are waiting for a service. We study sequencing problems as coalition form games defined in optimistic and pessimistic scenarios. Each agent's level of utility is his Shapley value payoff from the corresponding coalition form game. First, we show that while the core of the optimistic game is always empty, the Shapley value of the pessimistic game is an allocation in its core. Second, we impose the "generalized welfare lower bound" (GWLB) that ex-ante guarantees each agent a minimum level of utility. One of many application of GWLB is the "expected costs bound". It guarantees each agent his expected cost when all arrival orders are equally likely. We prove that the Shapley value payoffs (in both optimistic and pessimistic scenarios) satisfy GWLB if and only if it satisfies the expected costs bound (ECB). |
| Keywords: | Sequencing, welfare lower bounds, core, cooperative game, Shapley value |
| JEL: | C71 C72 D0 D3 D30 D6 D63 |
| Date: | 2023–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118680&r=upt |
| By: | Tim Leung; Hyungbin Park; Heejun Yeo |
| Abstract: | This paper analyzes the robust long-term growth rate of expected utility and expected return from holding a leveraged exchange-traded fund (LETF). When the Markovian model parameters in the reference asset are uncertain, the robust long-term growth rate is derived by analyzing the worst-case parameters among an uncertainty set. We compute the growth rate and describe the optimal leverage ratio maximizing the robust long-term growth rate. To achieve this, the worst-case parameters are analyzed by the comparison principle, and the growth rate of the worst-case is computed using the martingale extraction method. The robust long-term growth rates are obtained explicitly under a number of models for the reference asset, including the geometric Brownian motion (GBM), Cox--Ingersoll--Ross (CIR), 3/2, and Heston and 3/2 stochastic volatility models. Additionally, we demonstrate the impact of stochastic interest rates, such as the Vasicek and inverse GARCH short rate models. This paper is an extended work of \citet{Leung2017}. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.02084&r=upt |
| By: | Bertermann, Alexander (LMU Munich); Kamhöfer, Daniel A. (Heinrich Heine University Düsseldorf); Schildberg-Hörisch, Hannah (Heinrich Heine University Düsseldorf) |
| 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: | I26 I31 C26 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16454&r=upt |
| By: | Johannes Schünemann (University of Göttingen, Department of Economics); Holger Strulik (University of Göttingen, Department of Economics); Timo Trimborn (Department of Economics and Business Economics, Aarhus University) |
| Abstract: | In this paper, we provide a new theory that explains how the anticipation of future consumption leads to excessive savings. We introduce utility from anticipatory consumption into an otherwise standard endogenous growth model and assume that individuals cannot commit to future consumption plans. We show that the associated time-inconsistent decisions lead individuals to save more of their income than planned, and that this behavior increases growth but decreases welfare. We then modify the model to account for time-inconsistent decisions due to hyperbolic discounting, which in and of themselves would result in individuals saving less of their income than planned. By combining the assumptions of anticipatory consumption and hyperbolic discounting, we show that the excessive savings outcome is preserved for the benchmark calibration of the model. We also show that an alternative parameterization of the model exists where hyperbolically discounting individuals stick to their original consumption plan even though there are no commitment devices. |
| Keywords: | Anticipated Consumption, Time-Inconsistency, Over-Saving, Endogenous Growth, Discounting |
| JEL: | D91 E21 O40 |
| Date: | 2023–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2023-10&r=upt |
| By: | Anastasios Xepapadeas |
| Abstract: | One of the most important challenges in the study of climate change and its interactions with the economy is uncertainty. The present paper looks at this uncertainty from two different points of view. The first is the way that IPCC deals with uncertainty at its report and the way that uncertainty is communicated. The IPCC approach is implemented by a combination of qualitative and qualitative methods and the use of heuristics. IPCC studies climate change its evolution and its impact in a context, which in terms of decision making approach is akin to analysis under risk. The second is the point of view of the part of decision theory that deals with uncertainty in the Knightian sense and more specially with uncertainty which is manifested in multiple probabilistic models or priors. The presence of multiple priors is associated with ambiguity aversion and misspecification concerns that necessitate the use of maxmin optimizing approaches. The IPCC and the decision theory approaches are briefly reviewed and compared seeking ways to accommodate the concept of risky parameters or impacts of the IPCC framework, to the framework of optimization under uncertainty under multiple probabilistic models. |
| Keywords: | Climate change, IPCC, risk, uncertainty, misspecification, ambiguity aversion |
| JEL: | Q54 D81 |
| Date: | 2023–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:2315&r=upt |
| By: | Praful Raj |
| Abstract: | This literature review elucidates the implications of behavioral biases, particularly those stemming from overconfidence and framing, on the intertemporal choices made by students on their underline demand preferences for student loans. A secondary objective is to understand the potential utility of social media to assist students and young borrowers with the debt repayment process and management of their loan tenures. A close examination of the literature reveals a substantial influence of these behavioral and cognitive principles on the intertemporal choices made by students towards debt repayments. This affects not only the magnitude of loans they acquire but also the anchoring of the terms of loan conditions associated with repayment. Furthermore, I establish that harnessing social media as the potential to cultivate financial literacy and enhanced understanding of loan terms to expedite the process of debt redemption. This review could serve as a valuable repository for students, scholars, and policymakers alike, in order to expound on the cognitive biases that students and consumers often face when applying and entering into loan contract. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.02081&r=upt |
| By: | Ron S. Jarmin; John M. Abowd; Robert Ashmead; Ryan Cumings-Menon; Nathan Goldschlag; Michael B. Hawes; Sallie Ann Keller; Daniel Kifer; Philip Leclerc; Jerome P. Reiter; Rolando A. Rodríguez; Ian Schmutte; Victoria A. Velkoff; Pavel Zhuravlev |
| Abstract: | The use of formal privacy to protect the confidentiality of responses in the 2020 Decennial Census of Population and Housing has triggered renewed interest and debate over how to measure the disclosure risks and societal benefits of the published data products. Following long-established precedent in economics and statistics, we argue that any proposal for quantifying disclosure risk should be based on pre-specified, objective criteria. Such criteria should be used to compare methodologies to identify those with the most desirable properties. We illustrate this approach, using simple desiderata, to evaluate the absolute disclosure risk framework, the counterfactual framework underlying differential privacy, and prior-to-posterior comparisons. We conclude that satisfying all the desiderata is impossible, but counterfactual comparisons satisfy the most while absolute disclosure risk satisfies the fewest. Furthermore, we explain that many of the criticisms levied against differential privacy would be levied against any technology that is not equivalent to direct, unrestricted access to confidential data. Thus, more research is needed, but in the near-term, the counterfactual approach appears best-suited for privacy-utility analysis. |
| Keywords: | federal statistical system, data disclosure risk, data access |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:23-49&r=upt |
| By: | Ahlfeldt, Gabriel M.; Maennig, Wolfgang; Mueller, Steffen Q. |
| Abstract: | We document a generation gap in direct democracy outcomes across a wide range of topics that is causally related to aging. To this end, we combine different sources of postelection survey data covering more than 300 Swiss referenda and four decades. Young voters are more likely to support initiatives that favor their own generation in the present, e.g., a lower retirement age or increased unemployment benefits, or in favor of all generations in the future, e.g., environment protection. To estimate the causal effect of aging on political attitudes, we propose a novel unconstrained panel rank regression approach that separately identifies age and cohort effects. The aging effect on political attitudes is robust for controlling for arbitrary cohort effects and appears to be driven by expected utility maximization and not by habituation-induced status-quo bias. |
| Keywords: | age; cohort; direct democracy; status quo; referendum; Cohort; Referendum; Age; Direct democracy; Status quo |
| JEL: | P48 J10 D70 Q50 H40 H30 |
| Date: | 2022–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:111902&r=upt |
| By: | Leonardo Bursztyn; Benjamin R. Handel; Rafael Jimenez; Christopher Roth |
| 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. |
| JEL: | D62 D91 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31771&r=upt |
| By: | Ernst Fehr; Thomas Epper; Julien Senn |
| Abstract: | Parsimony is a desirable feature of economic models but almost all human behaviors are characterized by vast individual variation that appears to defy parsimony. How much parsimony do we need to give up to capture the fundamental aspects of a population’s distributional preferences and to maintain high predictive ability? Using a Bayesian nonparametric clustering method that makes the trade-off between parsimony and descriptive accuracy explicit, we show that three preference types—an inequality averse, an altruistic and a predominantly selfish type—capture the essence of behavioral heterogeneity. These types independently emerge in four different data sets and are strikingly stable over time. They predict out-of-sample behavior equally well as a model that permits all individuals to differ and substantially better than a representative agent model and a state-of-the-art machine learning algorithm. Thus, a parsimonious model with three stable types captures key characteristics of distributional preferences and has excellent predictive power. |
| Keywords: | Distributional preferences, altruism, inequality aversion, preference heterogeneity, stability, out-of-sample prediction, parsimony, bayesian nonparametrics |
| JEL: | D31 D63 C49 C90 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:439&r=upt |
| By: | Changxia Ke; Florian Morath; Sophia Seelos |
| Abstract: | This paper investigates whether distributional conflicts become more likely when groups are involved in the fight. We present results from a laboratory experiment in which two parties can appropriate resources via a contest or, alternatively, take an outside option. Keeping monetary gains expected from fighting constant across all treatments, the experiment compares conflict choices of players in two-against-two, one-against-one, and two-against-one settings. Overall, we find evidence for a higher propensity to opt for conflict when entering the fight in a group than when having to fight as a single player. The effects are strongest in endogenously maintained groups and in the presence of group size advantages (i.e., in two-against-one). The results can be explained by a stronger non-monetary utility from fighting in (endogenous) groups and coincide with a biased perception of the fighting strength in asymmetric conflict. |
| Keywords: | Conflict, contest, conflict resolution, group decision-making, group identity, alliance, experiment |
| JEL: | C92 D70 D72 D74 D91 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2023-16&r=upt |
| By: | Heidorn, Thomas; Watermeyer, Timo; Haar, Patrick |
| Abstract: | Retail investors are an essential group in shaping the effects of ESG investing and ESG assets under management are growing at an exponential rate. This study of retail investors' demand generates first evidence on their ESG-relevant decisions. In general, ESG was regarded as a highly interesting topic by retail investors, indicating that its role in financial decisions will further increase in the future. In practice, the portfolio of companies chosen to represent ESG values varies substantially across different funds. We found that, for most retail investors, ESG values have a meaningful relationship with each other. Nevertheless, there is no general agreement on how to fulfil these values. Only few relationships between specific ESG values and measures of achieving ESG values (MAVs) were determined. Moreover, no relationships were found between MAVs and indirect ESG values. Nevertheless, some MAVs had reliable relationships with each other and could be ranked according to controversiality, indicating that MAVs could be clustered for optimal representation of retail investor preference groups. Most retail clients prefer a financially optimal investment, but a meaningful group would accept lower performance to support their values. This confirms additional non-financial utility of investment decisions: Association or dissociation with certain ESG values. |
| Keywords: | ESG, ESG funds, retail investors, ESG investment, measures achieving values, ESG survey |
| JEL: | G11 G24 G32 Q56 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:234&r=upt |
| By: | Siuda, Fabian; Zörner, Thomas |
| Abstract: | Vaccinations are very effective in reducing the risk of infection on an individual level and thereby also reduce the risk of subsequently infecting others. This vaccination spillover effect reduces health related transaction costs in economic interactions and increases both consumer and producer surplus. In this paper, we quantify the valuation for vaccination spillovers for close contact services in an experimental setting. To generate a comprehensible scenario, we exploit the substitutability of testing for the disease and vaccination spillovers for infection risk reduction. We elicit individuals' willingness to pay (WTP) for testing and randomize the vaccination status of the service provider. The spillover effect of the service provider's vaccination is equivalent to 69% of the full infection risk reduction via testing. We demonstrate that higher levels of disease specific risk aversion increase both the WTP for testing and the vaccination spillover effect in levels, resulting in a constant relative vaccination spillover effect. |
| Keywords: | vaccinations; vaccination spillover; transaction costs; infection risk; randomized experiment |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:46225208&r=upt |