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on Utility Models and Prospect Theory |
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Issue of 2024‒05‒27
twelve papers chosen by |
| By: | Yuhki Hosoya |
| Abstract: | To study the assumption that the utility maximization hypothesis implicitly adds to consumer theory, we consider a mathematical representation of pre-marginal revolution consumer theory based on subjective exchange ratios. We introduce two axioms on subjective exchange ratio, and show that both axioms hold if and only if consumer behavior is consistent with the utility maximization hypothesis. Moreover, we express the process for a consumer to find the transaction stopping point in terms of differential equations, and prove that the conditions for its stability are equal to the two axioms introduced in the above argument. Therefore, the consumer can find his/her transaction stopping point if and only if his/her behavior is consistent with the utility maximization hypothesis. In addition to these results, we discuss equivalence conditions for axioms to evaluate their mathematical strength, and methods for expressing the theory of subjective exchange ratios in terms of binary relations. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.10931&r=upt |
| By: | Jose Ignacio Hernandez; Niek Mouter; Sander van Cranenburgh |
| Abstract: | Random utility maximisation (RUM) models are one of the cornerstones of discrete choice modelling. However, specifying the utility function of RUM models is not straightforward and has a considerable impact on the resulting interpretable outcomes and welfare measures. In this paper, we propose a new discrete choice model based on artificial neural networks (ANNs) named "Alternative-Specific and Shared weights Neural Network (ASS-NN)", which provides a further balance between flexible utility approximation from the data and consistency with two assumptions: RUM theory and fungibility of money (i.e., "one euro is one euro"). Therefore, the ASS-NN can derive economically-consistent outcomes, such as marginal utilities or willingness to pay, without explicitly specifying the utility functional form. Using a Monte Carlo experiment and empirical data from the Swissmetro dataset, we show that ASS-NN outperforms (in terms of goodness of fit) conventional multinomial logit (MNL) models under different utility specifications. Furthermore, we show how the ASS-NN is used to derive marginal utilities and willingness to pay measures. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.13198&r=upt |
| By: | Jon X. Eguia; Dimitrios Xefteris |
| Abstract: | We introduce a notion of political polarization that takes into account not just the distance between agents’ preferred policies, but also the intensity of this preference. We refer to this notion as “political divide” and we quantify it as the monetary cost, as a share of the total economy, that an agent is willing to incur to attain its ideal policy rather than the policy preferred by another agent. Groups with a large political divide are more likely to fall into affective polarization and political conflict. Holding ideological preferences constant, we show that the link between growth and the political divide between two ideologically separate groups depends on the curvature of the utility over wealth, as measured by the coefficient of relative risk-aversion: if agents’ relative risk aversion is below one, economic growth reduces the political divide; whereas, if agents are very risk-averse, growth increase the divide, exhacerbating political conflict. |
| Keywords: | Polarization, risk-aversion |
| JEL: | D72 H20 E62 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:03-2024&r=upt |
| By: | Francesco Lancia; Alessia Russo; Tim Worrall |
| Abstract: | How should successive generations insure each other when the young can default on previously promised transfers to the old? This paper studies intergenerational insurance that maximizes the expected discounted utility of all generations subject to participation constraints for each generation. If complete insurance is unattainable, the optimal intergenerational insurance is history-dependent even when the environment is stationary. The risk from a generational shock is spread into the future, with periodic resetting. Interpreting intergenerational insurance in terms of debt, the fiscal reaction function is nonlinear and the risk premium on debt is lower than the risk premium with complete insurance. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.10090&r=upt |
| By: | Charlotte Cordes; Jana Friedrichsen; Simeon Schudy |
| Abstract: | Procrastination is often attributed to time-inconsistent preferences but may also arise when individuals derive anticipatory utility from holding optimistic beliefs about their future effort costs. This study provides a rigorous empirical test for this notion of ‘motivated procrastination’. In a longitudinal experiment over four weeks, individuals must complete a cumbersome task of unknown length. We find that exogenous variation in scope for motivated reasoning results in optimistic beliefs among workers, which causally increase the deferral of work to the future. The roots for biased beliefs stem from motivated memory, such that procrastination may persist even if uncertainty is eventually resolved. |
| Keywords: | anticipatory utility, beliefs, memory, motivated cognition, procrastination, real effort, task allocation |
| JEL: | C91 D83 D84 D90 D91 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11072&r=upt |
| By: | Debraj Ray; Rajiv Vohra |
| Abstract: | We axiomatically characterize bargaining outcomes in the presence of coalitional threats. As in Nash’s solution, these involve the product of payoffs net of disagreement points, but coalitional threats appear as conventional constraints, and are not netted out from payoffs as disagreement points are. This asymmetry is implied by a new “expansion axiom†(along with standard axioms), one that is automatically satisfied in the standard bargaining problem. We then endogenize coalitional threats using internal consistency, requiring coalitions to be constrained by their subcoalitions just as the grand coalition is. For games with convex payoff sets, this consistent solution coincides with one in which the only threat from each coalition is their “standard†Nash solution, unconstrained by subcoalitions. For transferable-utility games, this observation uncovers a connection between the coalitional solution and the egalitarian solution of Dutta and Ray (1989, 1991). |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2024-001&r=upt |
| By: | Alessandro GUAZZINI |
| Abstract: | Since Veblen’s “The Leisure Class†was published in 1899, a considerable amount of literature on conspicuous consumption has been produced; while much has been said from a demand viewpoint, its supply side and social consequences rest largely undetermined. This paper aims at highlighting the highly conflictual interests between firms and the generality of consumers in a market characterized by conspicuous consumption. It also has in view to take a step forward towards the formalization of conspicuous consumption, to accelerate his admittance in the broadly accepted microeconomic theory. Starting from an analysis of the past literature and the state of the art in demand theory, I will first include positional concerns in an individual utility function. I will then examine the adverse economic and socio-psychological externalities that similar behaviors entail. I will eventually turn to the analysis of the supplier’s responsibility in shaping the phenomenon. Through an advertising augmented Lerner index I will investigate the role of a firm’s advertising expense in both raising markups and increasing conspicuous consumption’ negative effects. After an empirical analysis aimed at supporting my thesis, I will finally suggest a few remedies. |
| Keywords: | Conspicuous consumption, Positional concerns, Utility function, Profit function, Lerner index, Advertising externalities, Advertising tax |
| JEL: | D01 D62 D91 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_03.rdf&r=upt |
| By: | Dietzenbacher, Bas (RS: GSBE other - not theme-related research, QE Math. Economics & Game Theory); Dogan, Emre |
| Abstract: | This paper identifies the maximal domain of transferable utility games on which population monotonicity (no player is worse off when additional players enter the game) and egalitarian core selection (no other core allocation can be obtained by a transfer from a richer to a poorer player) are compatible, which is the class of games with an egalitarian population monotonic allocation scheme. On this domain, which strictly includes the class of convex games, population monotonicity and egalitarian core selection together characterize the Dutta-Ray solution. We relate the class of games with an egalitarian population monotonic allocation scheme to several other classes of games. |
| JEL: | C71 |
| Date: | 2024–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2024007&r=upt |
| By: | Silvia Angerer; Hanna Brosch; Daniela Glätzle-Rützler; Philipp Lergetporer; Thomas Rittmannsberger |
| Abstract: | We present representative evidence of discrimination against migrants through an incentivized choice experiment with over 2, 000 participants. Decision makers allocate a fixed endowment between two receivers. To measure discrimination, we randomly vary receivers’ migration background and other attributes, including education, gender, and age. We find that discrimination against migrants by the general population is both widespread and substantial. Our causal moderation analysis shows that migrants with higher education and female migrants experience significantly less discrimination. Discrimination is more pronounced among decision makers who are male, non-migrants, have rightwing political preferences, and live in regions with lower migrant shares. |
| Keywords: | discrimination, representative sample, migration, experiment |
| JEL: | C91 C93 J15 D90 |
| Date: | 2024–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2024-06&r=upt |
| By: | Jiayue Zhang; Ken Seng Tan; Tony S. Wirjanto; Lysa Porth |
| Abstract: | This paper extends the application of ESG score assessment methodologies from large corporations to individual farmers' production, within the context of climate change. Our proposal involves the integration of crucial agricultural sustainability variables into conventional personal credit evaluation frameworks, culminating in the formulation of a holistic sustainable credit rating referred to as the Environmental, Social, Economics (ESE) score. This ESE score is integrated into theoretical joint liability models, to gain valuable insights into optimal group sizes and individual-ESE score relationships. Additionally, we adopt a mean-variance utility function for farmers to effectively capture the risk associated with anticipated profits. Through a set of simulation exercises, the paper investigates the implications of incorporating ESE scores into credit evaluation systems, offering a nuanced comprehension of the repercussions under various climatic conditions. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.13818&r=upt |
| By: | E. Emanuel Rapsch |
| Abstract: | A general theory of stochastic decision forests reconciling two concepts of information flow -- decision trees and refined partitions on the one hand, filtrations from probability theory on the other -- is constructed. The traditional "nature" agent is replaced with a one-shot lottery draw that determines a tree of a given decision forest, while each "personal" agent is equipped with an oracle providing updates on the draw's result and makes partition refining choices adapted to this information. This theory overcomes the incapacity of existing approaches to extensive form theory to capture continuous time stochastic processes like Brownian motion as outcomes of "nature" decision making in particular. Moreover, a class of stochastic decision forests based on paths of action indexed by time is constructed, covering a large fraction of models from the literature and constituting a first step towards an approximation theory for stochastic differential games in extensive form. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.12332&r=upt |
| By: | Xue Dong He; Chen Yang; Yutian Zhou |
| Abstract: | Automated market makers are a popular type of decentralized exchange in which users trade assets with each other directly and automatically through a liquidity pool and a fixed pricing function. The liquidity provider contributes to the liquidity pool by supplying assets to the pool and in return they earn transaction fees from traders who trade through the pool. We propose a model of optimal liquidity provision in which the risk-averse liquidity provider decides the investment proportion of wealth she would like to supply to the pool, trade in a centralized market, and consume in multiple periods. We derive the liquidity provider's optimal strategy by dynamic programming and numerically find the optimal liquidity pool that maximizes the liquidity provider's utility. Our findings indicate that the exchange rate volatility on the centralized market exerts a positive effect on the optimal transaction fee. Moreover, the optimal constant mean pricing formula is found to be related to the relative performance of the underlying assets on the centralized market. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.13291&r=upt |