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on Utility Models and Prospect Theory |
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Issue of 2024‒06‒10
seven papers chosen by |
| By: | Kazumi Shimizu (Faculty of Political Science and Economics, Waseda University); Rongyu Hu (Graduate School of Economics, Waseda University) |
| Abstract: | This paper examines how ego utility influences decision making and shows that the desire to maintain or enhance one’s self-image can lead to the avoidance of useful information if it conflicts with existing beliefs. It challenges the traditional economic view of purely rational decision making focused on economic gain by incorporating ego utility into expected utility theory. The study provides theoretical evidence on how ego utility affects information processing and decision-making, suggesting that self-esteem plays a significant role. This work enriches the field of behavioural economics by shedding light on the reasons behind individuals’ reluctance to seek relevant information, highlighting the complex relationship between ego utility and information seeking behaviour. |
| Keywords: | ego utility; Bayesian updating; beta distribution |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:2403&r= |
| By: | Sudhir A. Shah (Department of Economics, Delhi School of Economics) |
| Abstract: | We propose an asset’s money-metric value as the appropriate representation of its subjective value to an investor. This value is expressed in monetary terms and is invariant across equivalent utility representations of the investor’s preference. The ordering of money-metric values across assets matches the investor’s preference ordering over the assets.The money-metric value of a risky asset is inversely related to the investor’s risk aversion, while the money-metric value of a risk-free asset is uniform across preferences with comparable risk-aversion. Finally, an asset’s arbitrage-free market price is the sum of its money-metric value and the investor’s willingness-to-pay for fully de-risking the asset. JEL Code: G11, G12 |
| Keywords: | money-metric asset valuation, arbitrage-free prices, risk aversion |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:347&r= |
| By: | Luke Snow; Vikram Krishnamurthy |
| Abstract: | This paper constructs an algorithmic framework for adaptively achieving the mechanism design objective, finding a mechanism inducing socially optimal Nash equilibria, without knowledge of the utility functions of the agents. We consider a probing scheme where the designer can iteratively enact mechanisms and observe Nash equilibria responses. We first derive necessary and sufficient conditions, taking the form of linear program feasibility, for the existence of utility functions under which the empirical Nash equilibria responses are socially optimal. Then, we utilize this to construct a loss function with respect to the mechanism, and show that its global minimization occurs at mechanisms under which Nash equilibria system responses are also socially optimal. We develop a simulated annealing-based gradient algorithm, and prove that it converges in probability to this set of global minima, thus achieving adaptive mechanism design. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.15391&r= |
| By: | Alicia Vidler; Toby Walsh |
| Abstract: | We present a new type of game, the Liquidity Game. We draw inspiration from the UK government bond market and apply game theoretic approaches to its analysis. In Liquidity Games, market participants (agents) use non-cooperative games where the players' utility is directly defined by the liquidity of the game itself, offering a paradigm shift in our understanding of market dynamics. Each player's utility is intricately linked to the liquidity generated within the game, making the utility endogenous and dynamic. Players are not just passive recipients of utility based on external factors but active participants whose strategies and actions collectively shape and are shaped by the liquidity of the market. This reflexivity introduces a level of complexity and realism previously unattainable in conventional models. We apply Liquidity Game theoretic approaches to a simple UK bond market interaction and present results for market design and strategic behavior of participants. We tackle one of the largest issues within this mechanism, namely what strategy should market makers utilize when uncertain about the type of market maker they are interacting with, and what structure might regulators wish to see. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.02865&r= |
| By: | Fabio Bellini; Tiantian Mao; Ruodu Wang; Qinyu Wu |
| Abstract: | We introduce a novel axiom of co-loss aversion for a preference relation over the space of acts, represented by measurable functions on a suitable measurable space. This axiom means that the decision maker, facing the sum of two acts, dislikes the situation where both acts realize as losses simultaneously. Our main result is that, under strict monotonicity and continuity, the axiom of co-loss aversion characterizes preference relations represented by a new class of functionals, which we call the duet expectiles. A duet expectile involves two endogenous probability measures, and it becomes a usual expectile, a statistical quantity popular in regression and risk measures, when these two probability measures coincide. We discuss properties of duet expectiles and connections with fundamental concepts including probabilistic sophistication, risk aversion, and uncertainty aversion. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.17751&r= |
| By: | d'Artis Kancs |
| Abstract: | Motivated by the recently experienced systemic shocks (the COVID-19 pandemic and the full-fledged Russia's war of aggression against Ukraine) - that have created new forms of uncertainties to our supplies - this paper explores the supply chain robustness under risk aversion and ambiguity aversion. We aim to understand the potential consequences of deeply uncertain systemic events on the supply chain resilience and how does the information precision affect individual agents' choices and the chain-level preparedness to aggregate shocks. Augmenting a parsimonious supply chain model with uncertainty, we analyse the relationship between the upstream sourcing decisions and the supply chain survival probability. Both risk-averse and ambiguity-averse individually-optimising agents' upstream sourcing paths are efficient but can become vulnerable to aggregate shocks. In contrast, a chain-level coordination of downstream firm sourcing decisions can qualitatively improve the robustness of the entire supply chain compared to the individual decision-making baseline. Such a robust decision making ensures that in the presence of an aggregate shock - independently of its realisation - part of upstream suppliers will survive and the final goods' supply will be ensured even under the most demanding circumstances. Our results also indicate that an input source diversification extracts a cost in foregone efficiency. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.03451&r= |
| By: | Emmanuelle Augeraud-Véron (BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Marc Leandri (SOURCE - SOUtenabilité et RésilienCE - UVSQ - Université de Versailles Saint-Quentin-en-Yvelines - IRD [France-Nord] - Institut de Recherche pour le Développement, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Health Economics published by John Wiley & Sons Ltd.In this contribution to the longstanding risk theory debate on optimal self-protection, we aim to enrich the microeconomic modeling of self-protection, in the wake of Ehrlich and Becker (1972), by exploring the representation of risk perception at the core of the Health Belief Model (HBM), a conceptual framework extremely influential in Public Health studies (Janz and Becker, 1984). In our two-period model, we highlight the crucial role of risk perception in the individual decision to adopt a preventive behavior toward a generic health risk. We discuss the optimal prevention effort engaged by an agent displaying either imperfect knowledge of the susceptibility (probability of occurrence) or the severity (magnitude of the loss) of a health hazard, or facing uncertainty on these risk components. We assess the impact of risk aversion and prudence on the optimal level of self-protection, a critical issue in the risk and insurance economic literature, yet often overlooked in HBM studies. Our results pave the way for the design of efficient information instruments to improve health prevention when risk perceptions are biased. |
| Keywords: | Health Belief Model, Prudence, Risk aversion, Risk perception, Self-protection, Uncertainty |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04557076&r= |