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on Utility Models and Prospect Theory |
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Issue of 2024‒04‒29
eleven papers chosen by |
| By: | Gandhi, Ashvin (NBER); Giuliano, Paola (University of California, Los Angeles); Guan, Eric (Riot Games); Keefer, Quinn (California State University San Marcos); McDonald, Chase (Riot Games); Pagel, Michaela (NBER); Tasoff, Joshua (Claremont Graduate University) |
| Abstract: | Economic research on entertainment is scant despite its large share of time use. We test economic theories of belief-based utility in the context of video-game engagement. Using data on 2.8 million matches from League of Legends, we find evidence supporting reference-dependent preferences, loss aversion, preferences for surprise and suspense, preferences for clumped surprise, and flow theory from psychology. We then leverage our estimated model and an evolutionary algorithm to find the information-revealing process that maximizes player engagement. We find that the optimal version of the game has increased game play equivalent to 43% of the winner-loser gap. |
| Keywords: | belief-based utility, reference-dependent utility, suspense and surprise, loss aversion, video games, entertainment design |
| JEL: | D8 D9 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16877&r=upt |
| By: | Mark Whitmeyer |
| Abstract: | We explore the connection between an agent's decision problem and her ranking of information structures. We find that a finite amount of ordinal data on the agent's ranking of experiments is enough to identify her (finite) set of undominated actions (up to relabeling and duplication) and the beliefs rendering each such action optimal. An additional smattering of cardinal data, comparing the relative value to the agent of finitely many pairs of experiments, identifies her utility function up to an action-independent payoff. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.06344&r=upt |
| By: | Florian Krach; Josef Teichmann; Hanna Wutte |
| Abstract: | Robust utility optimization enables an investor to deal with market uncertainty in a structured way, with the goal of maximizing the worst-case outcome. In this work, we propose a generative adversarial network (GAN) approach to (approximately) solve robust utility optimization problems in general and realistic settings. In particular, we model both the investor and the market by neural networks (NN) and train them in a mini-max zero-sum game. This approach is applicable for any continuous utility function and in realistic market settings with trading costs, where only observable information of the market can be used. A large empirical study shows the versatile usability of our method. Whenever an optimal reference strategy is available, our method performs on par with it and in the (many) settings without known optimal strategy, our method outperforms all other reference strategies. Moreover, we can conclude from our study that the trained path-dependent strategies do not outperform Markovian ones. Lastly, we uncover that our generative approach for learning optimal, (non-) robust investments under trading costs generates universally applicable alternatives to well known asymptotic strategies of idealized settings. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.15243&r=upt |
| By: | Takuma Kunieda (School of Economics, Kwansei Gakuin University); Akihisa Shibata (Institute of Economic Research, Kyoto University) |
| Abstract: | Although many studies in macroeconomics have examined the role of insurance in the presence of income risk, whether aggregate shocks are insurable has not been sufficiently investigated. We present a simple two-period general equilibrium model to show the conditions under which insurance against aggregate shocks works in an economy with constant-elasticity-substitution (CES) production technology and the Greenwood- Hercowitz-Huffman (GHH) utility function (Greenwood et al., 1988). Our theoretical investigation clarifies that only when agents are heterogeneous in their ability or initial wealth can aggregate shocks be insurable. From our quantitative investigation, we find that (i) agents with lower ability enjoy greater welfare improvement from insurance, and as agents' ability increases, the welfare improvement diminishes, (ii) agents enjoy greater welfare improvement when the damage from disasters is more severe and when the frequency of disasters is greater, and (iii) although the welfare improvement increases as agents' initial wealth increases, the impact of a difference in agents' initial wealth on the difference in the contribution of insurance is very moderate. |
| Keywords: | aggregate shocks, heterogeneous agents, state-contingent claims, incomplete market. |
| JEL: | D52 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:267&r=upt |
| By: | Yaacov Kopeliovich; Michael Pokojovy |
| Abstract: | Consider a stock market following a geometric Brownian motion and a riskless asset continuously compounded at a constant rate. Assuming the stock can go bankrupt, i.e., lose all of its value, at some exogenous random time (independent of the stock price) modeled as the first arrival time of a homogeneous Poisson process, we study the Merton's optimal portfolio problem consisting of maximizing the expected logarithmic utility of the total wealth at a preselected finite maturity time. First, we present a heuristic derivation based on a new type of Hamilton-Jacobi-Bellman equation. Then, we formally reduce the problem to a classical controlled Markovian diffusion with a new type of terminal and running costs. A new version of Merton's ratio is rigorously derived using Bellman's dynamic programming principle and validated with a suitable type of verification theorem. A real-world example comparing the latter ratio to the classical Merton's ratio is given. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.15923&r=upt |
| By: | Epper, Thomas (CNRS); Senn, Julien (University of Zurich); Fehr, Ernst (University of Zurich) |
| Abstract: | The empirical evidence on the existence of social preferences - or lack thereof - is predominantly based on student samples. Yet, knowledge about whether these findings can be extended to the general population is still scarce. In this paper, we compare the distribution of social preferences in a student and in a representative sample. Using descriptive analysis and a rigorous clustering approach, we show that the distribution of the general population's social preferences fundamentally differs from the students' distribution. In the general population, three types emerge: an inequality averse, an altruistic, and a selfish type. In contrast, only the altruistic and the selfish types emerge in the student population. The absence of an inequality averse type in the student population is particularly striking considering the fact that this type comprises about 50 percent of the individuals in the general population sample. Using structural estimation, we show that differences in age and education are likely to explain these results. Younger and more educated individuals - which typically characterize students - not only tend to have lower degrees of other-regardingness but this reduction in other-regardingness basically nullifies behindness aversion among students. Differences in income, however, do not seem to affect social preferences. These findings provide a new cautionary tale that insights from student populations might not extrapolate to the general population. |
| Keywords: | social preferences, altruism, inequality aversion, preference heterogeneity, subject pools, sample selection |
| JEL: | C80 C90 D30 D63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16865&r=upt |
| By: | Youngjin Hong (Department of Economics, Sogang University, Seoul, Korea); In Kyung Kim (Department of Economics, Sogang University, Seoul, Korea); Kyoo il Kim (Department of Economics, Michigan State University) |
| Abstract: | This paper empirically examines the extent to which enhancing a corporate image through diverse corporate social responsibility (CSR) activities affects consumer choices and firm sales. By utilizing sales and pricing information from the Korean instant noodles market in the 2010s, we find evidence that the improvement of Ottogi’s corporate image, one of the major instant noodle producers in the country, positively affected consumer utility for the firm’s products. Importantly, Ottogi’s annual sales increased by 52 million packages, or 12.4%, on average, thanks to the firm’s CSR activities and subsequent image improvement. This effect is equivalent in size to that of an 11% price cut or a 160% increase in advertising spending. Our findings suggest that CSR can promote firm growth by boosting product sales. |
| Keywords: | Corporate image, CSR, Nested Logit, Instant noodles |
| JEL: | D12 L66 M14 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:2304&r=upt |
| By: | Jinno, Masatoshi; Yasuoka, Masaya |
| Abstract: | This paper analyzes the impact of accepting foreign workers, not just from the perspective of an increase in imperfect substitute labor supply, but also including the indirect aspect of an increased educational burden due to the expansion of residency rights. The results lead to the conclusion that the conditions for improving the welfare of native residents, due to the increase in the supply of labor that cannot be perfectly substituted, may not only be met through this increase but also may be relaxed owing to labor movement between industries, which is facilitated by the increased educational burden resulting from the easing of residency rights. This indicates that the improvement in the utility of native residents could potentially be achieved under more relaxed conditions. |
| Keywords: | Foreign workers, Burden of schooling, Substitutability, Complementarity. |
| JEL: | I28 J6 |
| Date: | 2024–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120568&r=upt |
| By: | Rachel Schuh |
| Abstract: | I analyze the value workers ascribe to the gender composition of their workplace and the consequences of these valuations for occupational segregation, tipping, and welfare. To elicit these valuations, I survey 9, 000 U.S. adults using a hypothetical job choice experiment. This reveals that on average women and men value gender diversity, but these average preferences mask substantial heterogeneity. Older female workers are more likely to value gender homophily. This suggests that gender norms and discrimination, which have declined over time, may help explain some women’s desire for homophily. Using these results, I estimate a structural model of occupation choice to assess the influence of gender composition preferences on gender sorting and welfare. I find that workers’ composition valuations are not large enough to create tipping points, but they do reduce female employment in male-dominated occupations substantially. Reducing segregation could improve welfare: making all occupations evenly gender balanced improves utility as much as a 0.4 percent wage increase for women and a 1 percent wage increase for men, on average. |
| Keywords: | gender; labor; occupational choice |
| JEL: | J16 J24 J71 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98021&r=upt |
| By: | Yuyu Chen; Paul Embrechts; Ruodu Wang |
| Abstract: | We study the optimal decisions of agents who aim to minimize their risks by allocating their positions over extremely heavy-tailed (i.e., infinite-mean) and possibly dependent losses. The loss distributions of our focus are super-Pareto distributions which include the class of extremely heavy-tailed Pareto distributions. For a portfolio of super-Pareto losses, non-diversification is preferred by decision makers equipped with well-defined and monotone risk measures. The phenomenon that diversification is not beneficial in the presence of super-Pareto losses is further illustrated by an equilibrium analysis in a risk exchange market. First, agents with super-Pareto losses will not share risks in a market equilibrium. Second, transferring losses from agents bearing super-Pareto losses to external parties without any losses may arrive at an equilibrium which benefits every party involved. The empirical studies show that extremely heavy tails exist in real datasets. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.20171&r=upt |
| By: | Ofelia Bonesini; Antoine Jacquier; Aitor Muguruza |
| Abstract: | One the one hand, rough volatility has been shown to provide a consistent framework to capture the properties of stock price dynamics both under the historical measure and for pricing purposes. On the other hand, market price of volatility risk is a well-studied object in Financial Economics, and empirical estimates show it to be stochastic rather than deterministic. Starting from a rough volatility model under the historical measure, we take up this challenge and provide an analysis of the impact of such a non-deterministic risk for pricing purposes. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.11897&r=upt |