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on Utility Models and Prospect Theory |
| By: | William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City, NY, USA); Kangzheng Ding (Department of Economics, University of Kansas, Lawrence, KS 66045, USA) |
| Abstract: | While expected utility maximization and its foundations in the Savage Axioms play a major role in normative economics and Bayesian statistics, the axiomatic foundations of expected utility maximization have been the subject of extensive criticism over the years in terms of their descriptive ability to explain actual behavior in laboratory experiments. As a result, behavioral economists do not accept expected utility maximization as descriptive of observed consumer behavior. But the Savage Axioms have been substantially weakened and rendered more widely descriptive of observed behavior by replacing the usual Riemann integral with the Choquet [14] integral. In addition, the observed behavior under the weakened assumptions is relevant to behavior under uncertainty in the Frank Knight [47] sense, rather than the more restrictive context of behavior under risk with known probabilities. |
| Keywords: | Choquet integral; Sure-thing principle; Knightian uncertainty; Non-additive probabilities. 2020 Mathematics Subject Classification: 28A12, 28A25, 28C05, 28E10, 91B05, 91B06, 91B86. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202418 |
| By: | Deni Mazreka; Mark D. Verhagen; Ajay Kumar (EM - EMLyon Business School); Daniel Muzio |
| Abstract: | Merchants often use personalized pricing: they charge different consumers different prices for the same product. We assess the ethicality of personalized pricing by generalizing and extending an earlier model by Coker and Izaret (Journal of Business Ethics 173:387–398, 2021) who found that price personalization ethically outperforms unitary pricing. Using a simulation analysis, we show that these results crucially depend on the choice of parameters and do not hold universally. We further incorporate additional sources of marginal cost into the utility function that will likely arise from personalized pricing. These include the expectation that personalized pricing is widely considered unfair by consumers who prefer that all consumers are charged the same price (unitary pricing), and that firms often approximate the consumers' willingness-to-pay in ways that may raise negative sentiments among consumers who feel that their privacy is breached. By extending our model with disutility from unfairness perception and disutility from surveillance aversion, we demonstrate that personalized pricing is quickly outperformed by unitary pricing under social welfare functions that tend to prioritize total utility (utilitarianism and prioritarianism), whereas personalized pricing can ethically outperform unitary pricing under social welfare functions that tend to prioritize equality (egalitarianism and leximin). Our findings illustrate various intricacies and dynamics regarding the circumstances under which personalized pricing can be considered ethical. |
| Keywords: | Price discrimination, Personalized pricing, Willingness-to-pay, Utility, Artificial intelligence |
| Date: | 2024–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04850420 |
| By: | Christian Belzil (CREST, CNRS, Paris Polytechnic Institute, IZA, CIRANO); Tomáš Jagelka (University of Bonn, Dartmouth College, CREST-Ensae, IZA) |
| Abstract: | We develop a micro-founded framework for accounting for individuals' effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice. |
| Keywords: | Preferences, risk preference, stochastic choice models, endogenous effort, cognitive noise, task complexity, experimental design |
| JEL: | D91 C40 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:350 |
| By: | Jean-Sébastien Lenfant (PRISM, Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | The purpose of this article is to provide a historical account of the contributions to judgment and decision making by four cognitive psychologists at the turn of the 1970s: Sarah Lichtenstein, Paul Slovic, Amos Tversky and Daniel Kahneman. Beyond the usual focus on Kahneman and Tversky's heuristics and biases approach, we uphold that historians of behavioral economics would gain from a broader and more balanced view of the contributions of these four psychologists to the theory of decision making. Together with the heuristics and biases approach, experiments on preference reversal and choice intransitivities represent a multifaceted criticism of standard theories of choice and decision against which the genesis of behavioral economics could be evaluated. |
| Keywords: | Lichtenstein (Sarah), Slovic (Paul), Tversky (Amos), Kahneman (Daniel), heuristics and biases, preference reversal, intransitivity, preferences, behavioral economics, conjoint measurement, judgment, expected utility theory, mathematical psychology, cognitivism, experiments |
| JEL: | B21 B29 D91 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2024-31 |
| By: | Zvonimir Bašić (Adam Smith Business School, University of Glasgow, UK); Stefania Bortolotti (University of Bologna); Daniel Salicath (Norwegian Labour and Welfare Administration); Stefan Schmidt (Max Planck Institute for Research on Collective Goods, Bonn); Sebastian Schneider (Max Planck Institute for Research on Collective Goods, Bonn); Matthias Sutter (Max Planck Institute for Research on Collective Goods, Bonn, University of Cologne, Germany, University of Innsbruck, Austria, IZA Bonn, Germany, and CESifo Munich) |
| Abstract: | Incentives are supposed to increase effort, yet individuals react differently to incentives. We examine this heterogeneity by investigating how personal characteristics, preferences, and socio-economic background relate to incentives and performance in a real effort task. We analyze the performance of 1, 933 high-school students under a Fixed, Variable, or Tournament payment. Productivity and beliefs about relative performance, but hardly any personal characteristics, play a decisive role for performance when payment schemes are exogenously imposed. Only when given the choice to select the payment scheme, personality traits, economic preferences and socioeconomic background matter. Algorithmic assignment of payment schemes could improve performance, earnings, and utility, as we show. |
| Keywords: | Effort, productivity, incentives, personality traits, preferences, socio-economic background, ability, heterogeneity, sorting, algorithm, lab-in-the-field experiment |
| JEL: | C93 D91 J24 J41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:mpg:wpaper:2024_13 |
| By: | Rana, Sohel; Faye, Amy |
| Abstract: | Whilst migration to urban areas is often understood through higher wage opportunities, it is not well understood why many rural poor often prefer rural destinations, particularly during temporary migration. This preference also calls for an investigation of the household-level income effects of different destination choices. Our study focuses on northern rural Bangladesh, where rural-bound temporary migration is common. We employ a multi-step conditional probit model with subsamples to analyze temporary migrant’s destination choices, accounting for their self-selection into migration. Similarly, we apply a multi-step control function approach to address endogeneity in examining the income effects of different destination choices. Our results show that destination choices rely on migrants’ individual characteristics, prior perceptions and subsequent experiences of the destination, and the influence of migrant networks. Although rural destinations often offer a better income-to-cost ratio, they are not necessarily better than urban destinations in increasing total household income. In fact, remittances from rural-bound temporary migration are lower than those from urban-bound migration. Yet, rural destinations offer greater utility maximization in the face of migrants’ constraints, leading to a preference for this destination type among such migrants. |
| Keywords: | Community/Rural/Urban Development, Labor and Human Capital |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:ags:ubzefd:348395 |
| By: | Alistair Cameron (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Lata Gangadharan (Monash University [Clayton]); Pushkar Maitra (Monash University [Clayton]); Paulo Santos (Monash University [Clayton]); Joseph Vecci (GU - Göteborgs Universitet = University of Gothenburg) |
| Abstract: | Together with private transfers, centralized redistribution policies form the backbone of social welfare systems worldwide. Examining their interplay is therefore crucial for understanding and addressing inequality. We investigate the relationship between private transfers and public redistribution policies using an experiment with nearly 4000 participants from Germany, India, Indonesia and the USA. The experiment creates large inequalities, then introduces one of four centralized redistribution regimes to address the inequality. Our findings reveal that no redistribution policy changes private pro-social or anti-social transfers, compared to an environment without centralized redistribution. Structural estimates show that egotistic, rather than social motives drive private transfers, and that inequality aversion is unaffected by redistribution policies, thus explaining the lack of a private response. This suggests that governments possess an additional degree of freedom in pursuing social safety nets. |
| Keywords: | Redistribution, Inequality Aversion, Experiments |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cdiwps:hal-04811881 |
| By: | Anusha Chari; Karlye Dilts Stedman; Christian T. Lundblad |
| Abstract: | A new, high frequency measure of investor sentiment outperforms similar measures in forecasting investment activity in emerging markets. |
| Keywords: | risk-on/risk-off; global investor risk aversion; extreme events; tail risk; portfolio reallocation; return predictability |
| JEL: | F21 F36 F65 G11 G12 G15 G23 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99293 |
| By: | Andre, Peter; Flynn, Joel P.; Nikolakoudis, George; Sastry, Karthik A. |
| Abstract: | The near-rationality hypothesis holds that even very small costs of optimization may lead people to act suboptimally. We embed this idea in a standard model of consumption-savings decisions: households pursue simple quick-fix consumption policies unless they pay a cost to optimize. We design a novel survey to explore this theory. The survey elicits households' hypothetical consumption responses to a large number of unanticipated income shocks, allowing us to estimate household-level consumption policies. Consistent with the theory, 68% of households follow one of four simple quick-fix consumption rules that either fully consume or fully save out of small shocks before abruptly switching to similar consumption policies for large shocks. Households' quick-fixing types account for 49% of the variance in MPCs across households, despite not being predictable by other demographic and economic information. Quantitatively, an incomplete-markets model calibrated to our survey findings generates more than three times as much size-dependence in the aggregate consumption response to government transfer shocks as the nested rational model. This large difference in behavior arises while households experience consumption-equivalent welfare costs of near-rationality of at most $ 65 per quarter. |
| JEL: | E21 E71 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:306361 |