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on Utility Models and Prospect Theory |
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Issue of 2024‒03‒04
seven papers chosen by |
| By: | B. N. Kausik |
| Abstract: | Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient markets the utility of money is polymorphic, with risk aversion dependent on the information available in each context, i.e. the discount on each future cash flow depends on all information available on that cash flow. Specifically, we prove that in efficient markets, informed investors maximize return on volatility by being risk-neutral with riskless bonds, and risk-averse with equities, thereby resolving the puzzle. We validate our results on historical data with surprising consistency. JEL Classification: C58, G00, G12, G17 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.09265&r=upt |
| By: | Leo Chi U Seak; Simone Ferrari-Toniolo; Ritesh Jain; Kirby Nielsen; Wolfram Schultz |
| Abstract: | The past decades have seen tremendous progress in fundamental studies on economic choice in humans. However, elucidation of the underlying neuronal processes requires invasive neurophysiological studies that are met with difficulties in humans. Monkeys as evolutionary closest relatives offer a solution. The animals display sophisticated and well-controllable behavior that allows to implement key constructs of proven economic choice theories. However, the similarity of economic choice between the two species has never been systematically investigated. We investigated compliance with the independence axiom (IA) of expected utility theory as one of the most demanding choice tests and compared IA violations between humans and monkeys. Using generalized linear modeling and cumulative prospect theory (CPT), we found that humans and monkeys made comparable risky choices, although their subjective values (utilities) differed. These results suggest similar fundamental choice mechanism across these primate species and encourage to study their underlying neurophysiological mechanisms. |
| Keywords: | Independence axiom, utility, risk, choice |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:202316&r=upt |
| By: | Dianetti, Jodi (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University); Stanza, Lorenzo (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | We consider the strategic interaction of traders in a continuous-time financial market with Epstein-Zin-type recursive intertemporal preferences and performance concerns. We derive explicitly an equilibrium for the finite player and the mean-field version of the game, based on a study of geometric backward stochastic differential equations of Bernoulli type that describe the best replies of traders. Our results show that Epstein-Zin preferences can lead to substantially different equilibrium behavior. |
| Keywords: | Mean field games, portfolio choice, recursive utility, stochastic differential utility, BSDEs |
| Date: | 2024–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:685&r=upt |
| By: | Ozgur Evren (New Economic School) |
| Abstract: | For choice problems under ambiguity, I provide a behavioral characterization of a decision maker who holds a second-order belief and updates it in a Bayesian fashion in response to new information concerning the true distribution of the states. The model features a unique second-order belief that can be elicited from choice data and is quite comprehensive in terms of ambiguity attitudes and risk preferences. Special versions, such as the smooth ambiguity model or the recursive non-expected utilitymodel, are easily characterized by additional assumptions on compound-risk preferences. Thereby, the model provides a testing ground to compare and contrast these well-known representations as well as alternative specifications that may be of interest. To illustrate potential benefits of alternative specifications, I provide a detailed analysis of a rank-dependent extension of the smooth ambiguity model. |
| Keywords: | Ambiguity Aversion and Seeking, Ellsberg Paradox, Second-Order Belief, Probabilistic Sophistication, Bayesian Updating, Compound Risk JEL Classifications: D81, D83 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0291&r=upt |
| By: | Edoardo Berton; Alessandro Doldi; Marco Maggis |
| Abstract: | State-dependent preferences for a general Savage's state space were shown in Wakker and Zank (1999) to admit a numerical representation in the form of the integral of a state-dependent utility, as soon as pointwise continuity of the preference ordering is assumed. In this paper we prove that such a state-dependent function inherits pointwise continuity from the preference ordering, providing in this way a positive answer to a conjecture posed in the aforementioned seminal work. We further apply this result to obtain an explicit representation of conditional Chisini means in the form of a conditional certainty equivalent. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.09054&r=upt |
| By: | Porreca, Zachary |
| Abstract: | Bride kidnapping is a form of forced marriage in which a woman is taken against her will and coerced into accepting marriage with her captor. Post-Soviet Kyrgyzstan has seen a large increase in the prominence of this practice alongside a revitalization of traditional values and culture. As part of this resurgence of Kyrgyz identity and culture, the central government has formalized the authority of councils of elders called aksakals as an arbitrator for local dispute resolution- guided by informal principles of tradition and cultural norm adherence. Bride kidnapping falls within the domain of aksakal authority. In this study, I leverage data from a nationally representative survey and specify a latent class nested logit model of mens' marriage modality choice to analyze the impacts that aksakal governance has on the decision to kidnap. Based on value assessment questions on the survey, men are assigned to a probability distribution over latent class membership. Utility function parameters for each potential marriage modality are estimated for each latent class of men. Results suggest that living under aksakal governance makes men 9% more likely to obtain a wife through bride capture, with men substituting kidnapping for choice marriage modalities such as elopement and standard love marriages. |
| Keywords: | Bride Kidnapping, Forced Marriage, Informal Institutions, Kyrgyzstan |
| JEL: | J12 K42 N35 P37 O17 J16 Z10 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1391&r=upt |
| By: | Bui, Dzung; Dräger, Lena; Hayo, Bernd; Nghiem, Giang |
| Abstract: | Using representative household surveys conducted in Thailand and Vietnam during the COVID-19 pandemic, we find that the marginal propensity to consume is signicantly larger for positive than for negative income shocks. Moreover, we discover that the savings position plays a crucial role, as the effects are especially pronounced for households that experienced a decline in savings. This result contradicts a prediction from the life-cycle permanent income model with borrowing constraints as well as empirical evidence from industrialized countries. However, our ending is consistent with Kahneman and Tversky's prospect theory, according to which the combination of income uncertainty and loss aversion can lead households to react more strongly to positive shocks than to negative ones. |
| Keywords: | Marginal propensity to consume (MPC), Households' savings position, Unanticipated income shocks, COVID-19, Thailand, Vietnam |
| JEL: | D12 D14 E21 H31 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-717&r=upt |