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on Utility Models and Prospect Theory |
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Issue of 2024‒08‒19
twelve papers chosen by |
| By: | Navin Kartik; Andreas Kleiner |
| Abstract: | For multidimensional Euclidean type spaces, we study convex choice: from any choice set, the set of types that make the same choice is convex. We establish that, in a suitable sense, this property characterizes the sufficiency of local incentive constraints. Convex choice is also of interest more broadly. We tie convex choice to a notion of directional single-crossing differences (DSCD). For an expected-utility agent choosing among lotteries, DSCD implies that preferences are either one-dimensional or must take the affine form that has been tractable in multidimensional mechanism design. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.19063 |
| By: | Fabian Herweg (University of Bayreuth); Svenja Hippel (University of Bonn); Daniel Müller (University of Würzburg); Fabio Römeis (University of Würzburg) |
| Abstract: | In prosocial decisions, decision-makers are inherently uncertain about how their decisions impact others’ utility – we call this interpersonal uncertainty. We show that people's response to interpersonal uncertainty shapes well-known patterns of prosocial behavior. First, using standard social allocation decisions, we replicate the classic patterns of ingroup favoritism, merit-based fairness ideals, and self-favoring behavior in dictator games. We then show that these patterns also arise in non-social decisions which have no consequences for others and instead solely reflect responses to interpersonal uncertainty. Behavior across social and non-social decisions is highly correlated, and self-reported interpersonal uncertainty predicts behavior in both situations. Moreover, exogenously varying interpersonal uncertainty shifts prosocial behavior in the direction that avoids such uncertainty. Our results quantify how beliefs in the form of interpersonal uncertainty influence prosocial behavior, which we estimate to be of similar importance to social preferences. |
| Keywords: | Axiomatic rationality, Choice under risk, Context-dependent preferences, Mistakes, Regret theory |
| JEL: | C91 D01 D81 D91 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:326 |
| By: | Anujit Chakraborty (University of California); Luca Henkel (University of Chicago & University of CEMA) |
| Abstract: | In prosocial decisions, decision-makers are inherently uncertain about how their decisions impact others’ utility – we call this interpersonal uncertainty. We show that people's response to interpersonal uncertainty shapes well-known patterns of prosocial behavior. First, using standard social allocation decisions, we replicate the classic patterns of ingroup favoritism, merit-based fairness ideals, and self-favoring behavior in dictator games. We then show that these patterns also arise in non-social decisions which have no consequences for others and instead solely reflect responses to interpersonal uncertainty. Behavior across social and non-social decisions is highly correlated, and self-reported interpersonal uncertainty predicts behavior in both situations. Moreover, exogenously varying interpersonal uncertainty shifts prosocial behavior in the direction that avoids such uncertainty. Our results quantify how beliefs in the form of interpersonal uncertainty influence prosocial behavior, which we estimate to be of similar importance to social preferences. |
| Keywords: | Prosocial behavior, social preferences, ingroup versus outgroup decisions, dictator games, fairness preferences, interpersonal uncertainty |
| JEL: | C91 D01 D91 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:327 |
| By: | Stephen L. Cheung; Kieran MacGibbon; Arquette Milin-Byrne; Agnieszka Tymula |
| Abstract: | Alternatives to the standard model of time preference typically relax the assumption of an exponential discount function while retaining the framework of discounted utility. We report novel behavioural data inconsistent with this approach. Illustrating this claim, we estimate highly significant quasi-hyperbolic “present bias” (β = 0.833, smaller than 1 with p < 0.0001), despite our data exhibiting stationarity. The puzzle is resolved by relaxing discounted utility itself to allow discounting to be context dependent. We propose quasi-exponential discounting (QED) – a fixed penalty applied to all instances of delay, not only ones that begin in the present – as a particularly simple member of this class of models. This provides an excellent approximation to the best-fitting models, while retaining the analytical simplicity and ease of interpretation that have made exponential and quasi-hyperbolic discounting attractive in economic theory. |
| Keywords: | time preference, present bias, stationarity, relative discounting. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-16 |
| By: | Rocco Caferra (Unitelma Sapienza University of Rome, Rome, Italy.); Andrea Morone (University of Bari Aldo Moro, Bari, Italy.); Piergiuseppe Morone (Unitelma Sapienza University of Rome, Rome, Italy.) |
| Abstract: | This paper explores the impact of risk and ambiguity on wealth redistribution, using an experimental dictator game. The findings show that wealth redistribution significantly declined in line with increased perceived risk, suggesting that heightened risk and ambiguity may reduce altruistic behavior. Gender differences in risk aversion were observed under conditions of risk (characterized by well-defined probability), but vanished under conditions of ambiguity. The study highlights the importance of risk perception in shaping social preferences and the potential use of ambiguity as a moral rationale to avoid engagement in pro-social behaviors and wealth redistribution. |
| Keywords: | Dictator Game; Subjective Probability; Decision-Making; Experiment; Social Preferences; Risk Preferences; Ambiguity Box. |
| JEL: | D80 D81 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ipu:wpaper:115 |
| By: | Alex Gershkov (Department of Economics and the Federmann Center for the Study of Rationality, The Hebrew University of Jerusalem & University of Surrey); Benny Moldovanu (Department of Economics, University of Bonn); Philipp Strack (Department of Economics, Yale University); Mengxi Zhang (Department of Economics, University of Bonn) |
| Abstract: | We use the tools of mechanism design, combined with the theory of risk measures, to analyze a model where a cash constrained owner of an asset with stochastic returns raises capital from a population of investors that differ in their risk aversion and budget constraints. The distribution of the asset's cash flow is assumed here to be common-knowledge: no agent has private information about it. The issuer partitions and sells the asset's cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching (e.g., senior debt, junior debt and equity) where senior claims are paid before the subordinate ones. The holders of more senior/junior tranches are determined by the relative risk appetites of the different types of investors and of the issuer, with the more risk-averse agents holding the more senior tranches. Tranching endogenously arises here in an optimal mechanism because of simple economic forces: the differences in risk appetites among agents, and in the budget constraints they face. |
| Keywords: | Security Design, Risk Aversion, Tranching, Pooling |
| JEL: | D82 G00 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:325 |
| By: | Kensuke Ohtake |
| Abstract: | A new economic geography model is proposed in which the migration of mobile workers is proximate and perturbed by non-economic factors. The model consists of a tractable core-periphery model assuming a quasi-linear log utility function of consumers and an advection-diffusion equation governing the time evolution of a population distribution. The stability of a spatially homogeneous stationary solution and the large time behavior of solutions to the model on a one-dimensional periodic space are investigated. When the spatially homogeneous stationary solution is unstable, solutions starting around it are found to eventually form spatial patterns with several urban areas in which mobile workers agglomerate. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.05804 |
| By: | Holden, Stein T. (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tione, Sarah (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tilahun, Mesfin (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Katengeza, Samson (Centre for Land Tenure Studies, Norwegian University of Life Sciences) |
| Abstract: | We study risky inter-temporal choice in a large random student sample (n=721) and a large rural sample (n=835) in Malawi. All respondents were exposed to the same 20 Multiple Choice Lists with a rapid elicitation method that facilitated the identification of near-future Certainty Equivalents of future risky prospects placed 6, 12, and 24 months into the future. The probabilities of winning in the risky future prospects varied and facilitated the estimation of probability weighting functions for the risky prospects placed 6 and 12 months into the future. The experiment is used to test whether decision errors can explain or be highly correlated with hyperbolic discounting and non-linear (inverse-S-shaped) probability weighting. We find evidence that decision errors are strongly correlated with hyperbolic discounting but do not find that decision errors are correlated with the strong inverse-S-shaped probability weighting (w(p)) patterns in our two samples. We find stronger S-shaped and more pessimistic w(p) functions for 6-month horizon risky prospects than for 12-month horizon risky prospects in both samples. Both patience and optimism bias contribute to subjects taking higher risks related to more risky distant future prospects. This can lead to the postponement of climate action. |
| Keywords: | Decision errors; discounting; risky inter-temporal choice; probability weighting; Malawi |
| JEL: | C91 C93 D81 D84 D91 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nlsclt:2024_003 |
| By: | Holden, Stein T. (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tione, Sarah Ephrida (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tilahun, Mesfin (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Katengeza, Samson (Centre for Land Tenure Studies, Norwegian University of Life Sciences) |
| Abstract: | We investigate how random luck in repeated variants of the risky investment game of Gneezy, Leonard, and List (2009); Gneezy and Potters (1997) influences risk-taking and discounting behavior in future risky prospects with probabilistic payouts one week, six, 12, and 24 months into the future. We test non-parametrically whether luck enhances risk-taking and patience (reduces the discount rate) in risky prospects with delayed payouts. To investigate whether luck influences probability weighting (w(p) function), we estimate structural models with two-parameter Prelec probability weighting functions to decompose risk-taking in prospects with potential payouts six and 12 months into the future. We find that luck results in more optimistic (reduces the Prelec β parameter) and less non-linear (inverse-S-shaped) (increases the Prelec α parameter) w(p) function. We assess this for two samples from Malawi: one is a random sample of university students (n=721), and the other is a random sample (n=835) of rural subjects with limited education. The students were found to be more patient but had similar probability weighting functions. |
| Keywords: | Luck; Discounting; Risk-taking; Probability weighting |
| JEL: | C91 C93 D81 D84 D91 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nlsclt:2024_004 |
| By: | Robert J. Barro (Dept. of Economics, Harvard University); Tao Jin (Dept. of Economics, Harvard University) |
| Abstract: | The coefficient of relative risk aversion is a key parameter for analyses of behavior toward risk, but good estimates of this parameter do not exist. A promising place for reliable estimation is rare macroeconomic disasters, which have a major influence on the equity premium. The premium depends on the probability and size distribution of disasters, gauged by proportionate declines in per capita consumption or gross domestic product. Long-term national-accounts data for 36 countries provide a large sample of disasters of magnitude 10% or more. A power-law density provides a good fit to the size distribution, and the upper-tail exponent, α, is estimated to be around 4. A higher α signifies a thinner tail and, therefore, a lower equity premium, whereas a higher coefficient of relative risk aversion, γ, implies a higher premium. The premium is finite if α > γ. The observed premium of 5% generates an estimated γ close to 3, with a 95% confidence interval of 2 to 4. The results are robust to uncertainty about the values of the disaster probability and the equity premium, and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite. |
| Keywords: | Power law, rare disaster, equity premium, risk aversion |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:634 |
| By: | Tørstad, Vegard; Wiborg, Vegard |
| Abstract: | International review mechanisms can help states overcome collective action problems by revealing accurate information about their cooperative intent and performance. However, many existing review mechanisms have lenient informational requirements, leading to ambiguous reporting that impedes mutual verification of efforts and potentially undermines cooperation. This article evaluates how commitment ambiguity affects cooperation under the Paris Agreement on climate change, which features a pledge-and-review system where governments decide unilaterally on the depth of their commitments. We develop a decision-theoretic model of ambiguity and risk behavior in climate pledges that delineates the relationship between commitment ambiguity and ambition. In our model, commitment ambiguity is a sum of structural uncertainty and strategic ambiguity. We argue that structural uncertainty—information constraints that prevent governments from perfectly gauging their commitment potential—reduces ambition in climate pledges. This prudence effect is driven by compliance concern: The anticipated international and domestic audience costs arising from noncompliance induce policymakers to adjust ambition downward. Our empirical analysis of all climate pledges under the Paris Agreement demonstrates that ambiguous pledges are less ambitious than precise pledges, in line with our prudence conjecture. We also show that democracies are more prudent than autocracies, reflecting systemic variations in domestic audience costs. Overall, this article contributes an original theory of how ambiguity affects cooperation in international institutions and produces empirical findings that shed light on the effectiveness of international climate cooperation. |
| Keywords: | Social and Behavioral Sciences, Ambiguity, compliance, intergovernmental organizations, international environmental agreements, Paris Agreement, transparency |
| Date: | 2023–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:globco:qt7gd693zp |
| By: | Yuan Chang; Shuo Li Liu |
| Abstract: | Theorem 1 in Bikhchandani & Segal (2011; Theoretical Economics) suggests that a complete, transitive, monotonic, and continuous preference is regret based if and only if it is expected utility. Their Proposition 1 suggests that transitivity and continuity of a regret-based preference implies an equivalence condition: if random variables $X$ and $Y$ have the same distribution, then $X\sim Y$. We give counterexamples to Proposition 1. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.00055 |