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on Utility Models and Prospect Theory |
| By: | Luca De Gennaro Aquino; Sascha Desmettre; Yevhen Havrylenko; Mogens Steffensen |
| Abstract: | In intertemporal settings, the multiattribute utility theory of Kihlstrom and Mirman suggests the application of a concave transform of the lifetime utility index. This construction, while allowing time and risk attitudes to be separated, leads to dynamically inconsistent preferences. We address this issue in a game-theoretic sense by formalizing an equilibrium control theory for continuous-time Markov processes. In these terms, we describe the equilibrium strategy and value function as the solution of an extended Hamilton-Jacobi-Bellman system of partial differential equations. We verify that (the solution of) this system is a sufficient condition for an equilibrium and examine some of its novel features. A consumption-investment problem for an agent with CRRA-CES utility showcases our approach. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.16525 |
| By: | Abdellaoui, Mohammed (HEC Paris); Bleichrodt, Han (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Australian National University (ANU) - School of Economics); Gutierrez, Cédric (Bocconi University - Department of Management and Technology) |
| Abstract: | Overconfident behavior, the excessive willingness to bet on one’s performance, may be driven by optimistic beliefs and/or ambiguity attitudes. Separating these factors is key for understanding and correcting overconfident behavior, as they may call for different corrective actions. We present a method to do so, which we implement in two incentivized experiments. The first experiment shows the importance of ambiguity attitudes for overconfident behavior. Optimistic ambiguity attitudes (ambiguity seeking) counterbalanced the effect of pessimistic beliefs, leading to neither over- nor underconfident behavior. The second experiment applies our method in contexts where overconfident behavior is expected to vary: easy vs. hard tasks. Our results showed that task difficulty affected both beliefs and ambiguity attitudes. However, while beliefs were more optimistic for relative performance (rank) and more pessimistic for absolute performance (score) on easy tasks compared to hard tasks, ambiguity attitudes were always more optimistic on easy tasks for both absolute and relative performance. Our findings show the subtle interplay between beliefs and ambiguity attitudes: they can reinforce or offset each other, depending on the context, increasing or lowering overconfident behavior. |
| Keywords: | overconfidence; subjective expected utility; beliefs measurement; ambiguity attitudes; hard-easy effect. |
| JEL: | D81 D83 D91 |
| Date: | 2023–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1484 |
| By: | Carole Bernard; Stephan Sturm |
| Abstract: | We present a number of examples and counterexamples to illustrate the results on cost-efficiency in an incomplete market obtained in [BS24]. These examples and counterexamples do not only illustrate the results obtained in [BS24], but show the limitations of the results and the sharpness of the key assumptions. In particular, we make use of a simple 3-state model in which we are able to recover and illustrate all key results of the paper. This example also shows how our characterization of perfectly cost-efficient claims allows to solve an expected utility maximization problem in a simple incomplete market (trinomial model) and recover results from [DS06, Chapter 3], there obtained using duality. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.08756 |
| By: | Angelo Petralia |
| Abstract: | We investigate the choice behavior of a decision maker (DM) who harms herself, by maximizing some distortion of her true preference, in which the first $i$ alternatives are moved to the bottom, in a reversed order. The deterministic declination of our pattern has no empirical power, but it allows to define a degree of self-punishment, which measures the extent of the denial of pleasure adopted by the DM in her decision. We analyze irrational choices that display the lowest degree of self-punishment, and a characterization of them is provided. Moreover, we characterize the choice behavior that exhibits the highest degree of self-punishment, and we show that it comprises almost all choices. We also characterize stochastic self-punishment, which collects all the Random Utility Models (RUMs) whose support is restricted to the harmful distortions of some preference. Full identification of the DM's preference and randomization over its harmful distortions is allowed if each alternative is selected from the ground set with probability greater than zero. Finally, the degree of self-punishment of harmful stochastic choices is characterized. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.01317 |
| By: | Diana M Nova Díaz; Aritz Adin; Eduardo Sánchez Iriso |
| Abstract: | Responses on health-related quality of life measured by disease-specific instruments can be mapped onto the EQ-5D-5L to estimate utility values for economic evaluation. San Martin´s Quality of Life Scale (St. MQoL-S) is a preferred measure to obtain health outcomes in adults with cerebral palsy. Nevertheless, it lacks a preference-based health utility score for estimating quality-adjusted life years (QALYs). |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2024-07 |
| By: | Kensuke Ito |
| Abstract: | This paper surveys products and studies on cryptoeconomics and tokenomics from an economic perspective, as these terms are still (i) ill-defined and (ii) disconnected from economic disciplines. We first suggest that they can be novel when integrated; we then conduct a literature review and case study following consensus-building for decentralization and token value for autonomy. Integration requires simultaneous consideration of strategic behavior, spamming, Sybil attacks, free-riding, marginal cost, marginal utility and stabilizers. This survey is the first systematization of knowledge on cryptoeconomics and tokenomics, aiming to bridge the contexts of economics and blockchain. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.15715 |
| By: | Neil Christy; A. E. Kowalski |
| Abstract: | We use the exact finite sample likelihood and statistical decision theory to answer questions of ``why?'' and ``what should you have done?'' using data from randomized experiments and a utility function that prioritizes safety over efficacy. We propose a finite sample Bayesian decision rule and a finite sample maximum likelihood decision rule. We show that in finite samples from 2 to 50, it is possible for these rules to achieve better performance according to established maximin and maximum regret criteria than a rule based on the Boole-Frechet-Hoeffding bounds. We also propose a finite sample maximum likelihood criterion. We apply our rules and criterion to an actual clinical trial that yielded a promising estimate of efficacy, and our results point to safety as a reason for why results were mixed in subsequent trials. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.18206 |
| By: | Amirreza Talebi |
| Abstract: | Discrete choice models (DCMs) have been widely utilized in various scientific fields, especially economics, for many years. These models consider a stochastic environment influencing each decision maker's choices. Extensive research has shown that the agents' socioeconomic characteristics, the chosen options' properties, and the conditions characterizing the decision-making environment all impact these models. However, the complex interactions between these factors, confidentiality concerns, time constraints, and costs, have made real experimentation impractical and undesirable. To address this, simulations have gained significant popularity among academics, allowing the study of these models in a controlled setting using simulated data. This paper presents multidisciplinary research to bridge the gap between DCMs, experimental design, and simulation. By reviewing related literature, the authors explore these interconnected areas. We then introduce a simulation method integrated with experimental design to generate synthetic data based on behavioral models of agents. A utility function is used to describe the developed simulation tool. The paper investigates the discrepancy between simulated data and real-world data. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.17014 |
| By: | Costa-Font, Joan; Cowell, Frank |
| Abstract: | An individual’s inequality aversion (IA) is a central preference parameter that captures the welfare sacrifice from exposure to inequality. However, it is far from trivial how to best elicit IA estimates. Also, little is known about the behavioural determinants of IA and how they differ across domains such as income and health. Using representative surveys from England, this paper elicits comparable estimates of IA in the health and income domains using two alternative elicitation techniques: a direct trade-off and an indirect “imaginary-grandchild” approach that results from the choices between hypothetical lotteries. We make three distinct contributions to the literature. First, we show that IA systematically differs between income and health domains. Average estimates are around 0.8 for income IA and range from 0.8 to 1.5 for health IA. Second, we find that risk aversion and locus of control are central determinants of IA in both income and health domains. Finally, we present evidence suggesting that the distribution and comparison of IA vary depending on the elicitation method employed. |
| Keywords: | inequality and efficiency trade-offs; locus of control; inequality aversion; income inequality aversion; health inequality aversion; imaginary grandchild; risk attitudes |
| JEL: | H10 I18 |
| Date: | 2024–03–24 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124423 |
| By: | Dominique Desbois (UMR PSAE - Paris-Saclay Applied Economics - AgroParisTech - Université Paris-Saclay - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Daniel Kahneman, a researcher in cognitive psychology and professor at Princeton University, has highlighted cognitive biases in human behaviour, in particular aversion to the risk of loss, renewing our understanding of the psychological foundations of economics. |
| Keywords: | Behavioral Economics, Cogintive Psychology, United=States, Israel |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04620674 |
| By: | Gollier, Christian |
| Abstract: | Because of risk aversion, any sensible investment valuation system should value less projects that contribute more to the aggregate risk. In theory, this is done by adjusting discount rates to consumption betas. But in reality, most public institutions use a dis-count rate that is rather insensitive to the risk profile of their investment projects. The economic consequences of the implied misallocation of capital are severe. I calibrate a Lucas model in which the investment opportunity set contains a constellation of projects with different expected returns and risk profiles. The model matches the traditional finan-cial and macro moments, together with the observed heterogeneity of assets’ risk profiles. The welfare loss of using a single discount rate is equivalent to a permanent reduction in consumption that lies somewhere between 15% and 45% depending upon which single discount rate is used. |
| Keywords: | Discounting; investment theory; asset pricing; carbon pricing; Arrow-Lind theorem; WACC fallacy; rare disasters; capital budgeting |
| JEL: | G12 H43 Q54 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129648 |
| By: | Grace C. Liu (Research to Empower, Syosset, New York, USA); Willem Spanjers (Kingston University London, UK; ICEA; Rimini Centre for Economic Analysis) |
| Abstract: | This research focuses on the role of uncertainty in explaining gender disparities in entrepreneurship by testing a behavioral decision model. It examines how misperceptions and ambiguity affect men’s and women’s decisions on founding startups or maintaining established firms in developed and developing countries. It starts from the theoretical assumption that entrepreneurial decision-making follows the specific version of cumulative prospect theory. This model incorporates the Ellsberg paradox and the Allais paradox. Data from the Global Entrepreneurship Monitor in 46 countries/territories over 2013–2019 was used for a panel data econometric analysis using Generalized Least Squares (GLS) and fixed-effects models. After the panel data analysis, a binomial sign test and signed-rank tests were done to validate the theory on gender disparities in entrepreneurship. Findings indicate that there are clear gender differences in behavioral characteristics of entrepreneurs in the face of varying uncertainty levels according to three business development stages. During the startup stage, confidence in ability and confidence from knowing an entrepreneur is positively associated with entrepreneurial rates, whereas fearing the worst is negatively associated. Gender-bias discount factor progressively hinders women rather than men as the business develops, particularly for women in developing countries. During the established business stage, fearing the worst, confidence, and high reference points are positively associated, especially for women’s entrepreneurship. Due to a self-selection effect, once women can enter the scale-up stage, they are more likely than men to continue to the established business stage. This research concludes that effective policies should consider the specific needs of women and the barriers that women face when setting up and sustaining businesses. It underlines how women’s economic empowerment contributes to gender equality and broader societal advancement. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-13 |