nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2024–11–25
fourteen papers chosen by
Alexander Harin


  1. On the Nature of Certainty Equivalent Functionals By Hennessy, David; Lapan, Harvey
  2. Bayesian Rationality with Subjective Evaluations in Enlivened Decision Trees By Hammond, Peter J
  3. Axiomatization of the core of positive games By Dehez, Pierre
  4. The Subtlety of Optimal Paternalism in a Population with Bounded Rationality By Charles F. Manski; Eytan Sheshinski
  5. Counterfactual Analysis in Empirical Games By Brendan Kline; Elie Tamer
  6. Capturing Perception to Poverty using Conjoint Analysis & Partial Profile Choice Experiment By Anushka De; Diganta Mukherjee
  7. Time evaluation of portfolio for asymmetrically informed traders By Bernardo D'Auria; Carlos Escudero
  8. A rent-seeking perspective on imperial peace By Indraneel Dasgupta
  9. Arbitrage entre assurance et auto-assurance contre les risques naturels By Guibril Zerbo
  10. The Pond Dilemma with Heterogeneous Relative Concerns By Pawe{\l} Gola
  11. On choice inconsistency: the ‘error’ error in behavioural paternalism By Oliver, Adam
  12. Does the Gini index represent people's views on inequality? By Brice Magdalou; Gaëlle Aymeric
  13. Leniency in antitrust investigations as a cooperative game By Dehez, Pierre; Ferey, Samuel
  14. Inflation Expectations and Economic Preferences By Lena Dräger; Maximilian Floto; Marina Schröder

  1. By: Hennessy, David; Lapan, Harvey
    Abstract: We explore connections between the certainty equivalent return (CER) functional and the underlying utility function. Curvature properties of the functional depend upon how utility function attributes relate to Hyperbolic Absolute Risk Aversion (HARA) type utility functions. If the CER functional is concave, i.e., if risk tolerance is concave in wealth, then preferences are standard. The CER functional is linear in lotteries if utility is HARA and lottery payoffs are on a line in state space. Implications for the optimality of portfolio diversification are given. When utility is concave and Non-increasing Relative Risk Averse, then the CER functional is superadditive in lotteries. Depending upon the nature of covariation among lottery payoffs, CERs for Constant Absolute Risk Averse utility functions may be subadditive or superadditive in lotteries. Our approach lends itself to straightforward experiments to elicit higher order attributes on risk preferences.
    Date: 2024–10–29
    URL: https://d.repec.org/n?u=RePEc:isu:genstf:202410291658110000
  2. By: Hammond, Peter J (University of Warwick)
    Abstract: A decision-making agent is usually assumed to be Bayesian rational, or to maximize subjective expected utility, in the context of a completely and correctly speci ed decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, and of Shackle's (1953) concept of potential surprise, this paper considers enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than model mis-speci cation, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider three motivating examples based on: (i) Homer's classic tale of Odysseus and the Sirens; (ii) a two-period linear-quadratic model of portfolio choice; (iii) the game of Chess. Though our novel framework transcends standard notions of risk or uncertainty, a form of Bayesian rationality is still possible. Instead of subjective probabilities of different models of a classical finite decision tree, we show that Bayesian rationality and continuity imply subjective expected utility maximization when some terminal nodes have attached real-valued subjective evaluations instead of consequences. Moreover, subjective evaluations lie behind, for example, the kind of Monte Carlo tree search algorithm that has been used by some powerful chess-playing software packages.
    Keywords: Prerationality ; consequentialist decision theory ; entrepreneurship ; potential surprise ; enlivened decision trees ; subjective evaluation of continuation ; subtrees ; Monte Carlo tree search. JEL Codes: D81 ; D91 ; D11 ; D63
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:wrk:warwec:1524
  3. By: Dehez, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: The core is an additive solution on the set of convex transferable utility games. We show that additivity, together with efficiency, individual rationality and the null player property, characterizes the core of positive games.
    Keywords: Core ; convex games ; positive games
    JEL: C71
    Date: 2024–06–01
    URL: https://d.repec.org/n?u=RePEc:cor:louvco:2024011
  4. By: Charles F. Manski; Eytan Sheshinski
    Abstract: We consider a utilitarian planner with the power to design a discrete choice set for a heterogeneous population with bounded rationality. We find that optimal paternalism is subtle. The policy that most effectively constrains or influences choices depends on the preference distribution of the population and on the choice probabilities conditional on preferences that measure the suboptimality of behavior. We first consider the planning problem in abstraction. We next examine policy choice when individuals measure utility with additive random error and maximize mismeasured rather than actual utility. We then analyze a class of problems of binary treatment choice under uncertainty. Here we suppose that a planner can mandate a treatment conditional on publicly observed personal covariates or can decentralize decision making, enabling persons to choose their own treatments. Bounded rationality may take the form of deviations between subjective personal beliefs and objective probabilities of uncertain outcomes. We apply our analysis to clinical decision making in medicine. Having documented that optimization of paternalism requires the planner to possess extensive knowledge that is rarely available, we address the difficult problem of paternalistic policy choice when the planner is boundedly rational.
    Date: 2024–10
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2410.13658
  5. By: Brendan Kline; Elie Tamer
    Abstract: We address counterfactual analysis in empirical models of games with partially identified parameters, and multiple equilibria and/or randomized strategies, by constructing and analyzing the counterfactual predictive distribution set (CPDS). This framework accommodates various outcomes of interest, including behavioral and welfare outcomes. It allows a variety of changes to the environment to generate the counterfactual, including modifications of the utility functions, the distribution of utility determinants, the number of decision makers, and the solution concept. We use a Bayesian approach to summarize statistical uncertainty. We establish conditions under which the population CPDS is sharp from the point of view of identification. We also establish conditions under which the posterior CPDS is consistent if the posterior distribution for the underlying model parameter is consistent. Consequently, our results can be employed to conduct counterfactual analysis after a preliminary step of identifying and estimating the underlying model parameter based on the existing literature. Our consistency results involve the development of a new general theory for Bayesian consistency of posterior distributions for mappings of sets. Although we primarily focus on a model of a strategic game, our approach is applicable to other structural models with similar features.
    Date: 2024–10
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2410.12731
  6. By: Anushka De; Diganta Mukherjee
    Abstract: The objective of this study is applying a utility based analysis to a comparatively efficient design experiment which can capture people's perception towards the various components of a commodity. Here we studied the multi-dimensional poverty index and the relative importance of its components and their two-factor interaction effects. We also discussed how to model a choice based conjoint data for determining the utility of the components and their interactions. Empirical results from survey data shows the nature of coefficients, in terms of utility derived by the individuals, their statistical significance and validity in the present framework. There has been some discrepancies in the results between the bootstrap model and the original model, which can be understood by surveying more people, and ensuring comparative homogeneity in the data.
    Date: 2024–10
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2410.11398
  7. By: Bernardo D'Auria; Carlos Escudero
    Abstract: We study the anticipating version of the classical portfolio optimization problem in a financial market with the presence of a trader who possesses privileged information about the future (insider information), but who is also subjected to a delay in the information flow about the market conditions; hence this trader possesses an asymmetric information with respect to the traditional one. We analyze it via the Russo-Vallois forward stochastic integral, i. e. using anticipating stochastic calculus, along with a white noise approach. We explicitly compute the optimal portfolios that maximize the expected logarithmic utility assuming different classical financial models: Black-Scholes-Merton, Heston, Vasicek. Similar results hold for other well-known models, such as the Hull-White and the Cox-Ingersoll-Ross ones. Our comparison between the performance of the traditional trader and the insider, although only asymmetrically informed, reveals that the privileged information overcompensates the delay in all cases, provided only one information flow is delayed. However, when two information flows are delayed, a competition between future information and delay magnitude enters into play, implying that the best performance depends on the parameter values. This, in turn, allows us to value future information in terms of time, and not only utility.
    Date: 2024–10
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2410.16010
  8. By: Indraneel Dasgupta
    Abstract: We model a rent-seeking contest among two ‘identity ideologues’, differentially located along a uni-dimensional identity continuum, and a ‘mercenary’, who can choose any location in-between. The contest jointly awards an identity-relevant good (‘religion’) and an identity-irrelevant good (‘money’). The mercenary values only money, the ideologues value both money and religion. The ideologues are worse off, at an increasing rate, when the winner is located farther away. We show that, under reasonable restrictions, the following hold. A decline in the mercenary’s cost of contest effort reduces conflict. Both ideologues lose in success probability but gain in expected utility. Elimination of the mercenary increases conflict and makes the ideologues more successful yet worse off. Our results rationalize ‘imperial peace’ – long periods of stability and social peace in multi-ethnic empires and explain why the weakening and breakdown of such empires is often associated with a sharp rise in ethnic violence within their territories.
    Keywords: Rent-seeking contest, Identitarian distance, Ethnic conflict, Imperial peace,
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:not:notcre:24/06
  9. By: Guibril Zerbo
    Abstract: This article studies the effect of preferences on an individual's optimal choice between insurance demand and self-insurance in a risk context and then in an ambiguous context. The innovative idea in this paper is to introduce ambiguity about the effectiveness of self-insurance to understand the nature of the relationship between insurance demand and self-insurance demand. We show that an increase in risk aversion increases the demand for insurance and decreases the demand for self-insurance. However, when risk is introduced on the effectiveness of self-insurance, we show that the individual still prefers self-insurance to market insurance. We also show that when ambiguity is introduced on the efficacy of self-insurance, the individual always prefers market insurance to self-insurance. Finally, we determine the conditions under which the individual's self-insurance effort is higher or lower under ambiguity than risk.
    Keywords: Natural risks, arbitration, insurance, self-insurance, efficacy, risk, ambiguity
    JEL: D81 G22 Q54
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:drm:wpaper:2024-30
  10. By: Pawe{\l} Gola
    Abstract: This paper explores team formation when workers differ in skills and their desire to out-earn co-workers. I cast this question as a two-dimensional assignment problem with imperfectly transferable utility and show that equilibrium sorting optimally trades off output maximisation with the need to match high-skill workers to co-workers with weak relative concerns. This can lead to positive (negative) assortative matching in skill even with submodular (supermodular) production functions. Under supermodular production, this heterogeneity in preferences benefits all workers and reduces wage inequality. With submodular production, the distributional consequences are ambiguous, and some workers become worse off. The model reveals that skill-biased technological change (SBTC) incentivises domestic outsourcing, as firms seek to avoid detrimental social comparisons between high- and low-skill workers, thus providing a compelling explanation for the long-term increase in outsourcing. Finally, the benefits of SBTC can trickle down to low-skill workers-but only those whose relative concerns are weak.
    Date: 2024–10
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2410.12566
  11. By: Oliver, Adam
    Abstract: A core normative assumption of welfare economics is that people ought to maximise utility and, as a corollary of that, they should be consistent in their choices. Behavioural economists have observed that people demonstrate systematic choice inconsistences, but rather than relaxing the normative assumption of utility maximisation they tend to attribute these behaviours to individual error. I argue in this article that this, in itself, is an error – an ‘error error’. In reality, a planner cannot hope to understand the multifarious desires that drive a person’s choices. Consequently, she is not able to discern which choice in an inconsistent set is erroneous. Moreover, those who are inconsistent may view neither of their choices as erroneous if the context reacts meaningfully with their valuation of outcomes. Others are similarly opposed to planners intervening in the market mechanism to correct for behavioural inconsistencies, and advocate that the free market is the best means by which people can settle on mutually agreeable exchanges. However, I maintain that policy makers have a legitimate role in also enhancing people’s agentic capabilities. The most important way in which to achieve this is to invest in aspects of human capital and to create institutions that are broadly considered foundational for a person’s agency. However, there is also a role for so-called boosts to help to correct basic characterisation errors. I further contend that government regulations against self-interested acts of behavioural-informed manipulation by one party over another are legitimate, to protect the manipulated party from undesired inconsistency in their choices.
    JEL: J1
    Date: 2024–10–22
    URL: https://d.repec.org/n?u=RePEc:ehl:lserod:125845
  12. By: Brice Magdalou (CNRS, AMSE, France); Gaëlle Aymeric (CEE-M, University of Montpellier, France)
    Abstract: This paper presents findings from a web-experiment on a representative sample of the French population. It examines the acceptability of the Pigou-Dalton principle of transfers, which posits that transferring income from an individual to a relatively poorer one, reduces overall inequality. While up to 60% of respondents reject standard transfers, the three alternative transfers we test receive more approval, especially those promoting solidarity among lower-income recipients. The study then models respondents’ preferences with two types of social welfare functions, utilitarian and Extended Gini. The Extended Gini model aligns better with individual preferences. Nevertheless, Extended Gini-type social welfare functions that adhere to the principle of transfers (including the one underlying the Gini index) poorly capture preferences of each individual. However, quite surprisingly, the preferences of the median individual align almost perfectly with the Gini-based function, using either parametric or non-parametric estimates.
    Keywords: Gini Index, Web Experiment, Progressive Transfers, Social Welfare Functions, Inequality, Utilitarianism, Extended Gini, Ethical Preferences
    JEL: C51 C99 D31 D63
    Date: 2024–11
    URL: https://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2024-678
  13. By: Dehez, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Ferey, Samuel (University of Lorraine)
    Abstract: Leniency programs in antitrust investigations exist in Europe since the late nineties. They cover secret agreements and concerted practices between companies, and provide total or partial immunity to companies reporting evidence. This raises the question of assessing correctly the contribution of each company that take part in a leniency program. This question is formalized within a cooperative game with transferable utility. The resulting game being convex, its core is nonempty and contains the Shapley value in its center. It defines a reference allocation that treats the participants symmetrically. In practice, companies report sequentially leading to allocations that are vertices of the core.
    Keywords: Competition law ; leniency programs ; core ; Shapley value
    JEL: L40 K21 C71
    Date: 2024–05–13
    URL: https://d.repec.org/n?u=RePEc:cor:louvco:2024008
  14. By: Lena Dräger; Maximilian Floto; Marina Schröder
    Abstract: We provide evidence for an expectation gap, where risk-averse as well as impatient households and experts provide significantly higher prior inflation forecasts. Using a survey randomized control trial (RCT), we can show that information about inflation forecasts closes this expectations gap. The group, whose prior expectations was farthest from the treatment information, tends to adjust posterior expectations more strongly. However, we find no such effect with respect to forecasts for energy prices, which are less informative. Our results suggest that the expectation gap seems to be partially due to differences in information seeking between different types of individuals.
    Keywords: inflation expectations, patience, risk preference, households, experts, survey experiment, randomized control trial (RCT)
    JEL: E52 E31 D84 D90
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:ces:ceswps:_11326

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