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on Utility Models and Prospect Theory |
| By: | René van den Brink (VU University Amsterdam and Tinbergen Institute); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | This paper aims to connect the social network literature on centrality measures with the economic literature on von Neumann-Morgenstern expected utility functions using cooperative game theory. The social network literature studies various concepts of network centrality, such as degree, betweenness, connectedness, and so on. This resulted in a great number of network centrality measures, each measuring centrality in a different way. In this paper, we aim to explore which centrality measures can be supported as von Neumann-Morgenstern expected utility functions, reflecting preferences over different network positions in different networks. Besides standard axioms on lotteries and preference relations, we consider neutrality to ordinary risk. We show that this leads to a class of centrality measures that is fully determined by the degrees (i.e. the numbers of neighbours) of the positions in a network. Although this allows for externalities, in the sense that the preferences of a position might depend on the way how other positions are connected, these externalities can be taken into account only by considering the degrees of the network positions. Besides bilateral networks, we extend our result to general cooperative TU-games to give a utility foundation of a class of TU-game solutions containing the Shapley value. |
| Keywords: | group decisions and negotiations, weighted graph, degree centrality, von Neumann-Morgenstern expected utility function, cooperative game |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04188289 |
| By: | Mark Whitmeyer |
| Abstract: | I conduct a robust comparative statics exercise for a risk-averse subjective expected utility (SEU) maximizer. Starting with a finite menu of actions totally ordered by sensitivity to risk, I study the transformations of the menu that lead the decision-maker to take a lower action, regardless of her particular utility function or belief. My main results reveal that a robust decrease in the action selected is guaranteed by an intuitive steepening of the actions' payoffs and necessitates a slightly weaker such steepening. I show that this basic pattern generalizes to a broad class of non-EU preferences. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.12926 |
| By: | Jean-Pierre Drugeon (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thai Ha-Huy (Université Paris-Saclay, EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay) |
| Abstract: | This paper provides a framework for understanding preferences over utility streams across different time periods. We analyze preferences for the close future, for the distant future, and a synthesis of both, establishing a representation involving weights over time periods. Examining scenarios where two utility streams cannot be robustly compared to each other, we introduce notions in which one has more "potential" to be preferred over another, which lead to MaxMin, MaxMax, and -MaxMin representations. Finally, we consider temporal bias in the form of violations of stationarity. For close future preferences, we obtain a generalization of quasi-hyperbolic discounting. For distant future preferences, we obtain Banach limits and discuss the relationship with exponential discounting. |
| Keywords: | Axiomatization, Myopia, Multiple discounts, Alpha-MaxMin criteria, Temporal biases, Banach limits |
| Date: | 2023–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04331306 |
| By: | Rory Allanson (University of Strathclyde); Matthew Robson (Erasmus University Rotterdam and Tinbergen Institute) |
| Abstract: | We develop a social choice experiment to estimate public preferences on population ethics. Our experiment poses three within-subject treatments in which participants allocate scarce resources to determine the health-related quality-of-life, and existence, of two population groups. Within a flexible social welfare function, we estimate participant-level preferences for inequality aversion, average vs total welfare maximisation, and minimum `critical level' thresholds. By combining random behavioural and random utility models we also explicitly model `noise' in decision making. Using a sample of British adults (n=115, obs.=5, 060), we find that 98.7% of respondents are inequality averse, prioritising the worst-off at the expense of efficiently maximising overall health. The modal group of participants (39.2%) maximise total welfare and have a critical level threshold of zero, however there is extensive heterogeneity in participants' population preferences. We then demonstrate how these preferences can aid policymaking, where difficult trade-offs emerge between equity and efficiency, average and total welfare, and population size. |
| Keywords: | Experiment, Health, Social Welfare, Inequality, Population Ethics |
| JEL: | C90 D63 I18 |
| Date: | 2024–11–03 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240067 |
| By: | Jean-Marc Bonnisseau (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UP1 - Université Paris 1 Panthéon-Sorbonne); Alain Chateauneuf (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne); Jean-Pierre Drugeon (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | This article is interested in future allocations of scarce resources in an environment where upper bounds and lower bounds are fixed on the stream of consumptions or extractions of the scarce resource. It is shown that we can compute the optimal planning of consumptions independently from an explicit sequence of discounting factors as soon as they are decreasing at a rate smaller than a bound linked to the concavity of the utility function and the choice of the sequences of lower and upper bounds. The optimal solution is unique and exhibits two regimes with a pivotal period in the middle. Therefore, one gets plans satisfying some kind of intergenerational fairness: while the highest e ort is supported by the first generations, it then decreases for the remaining ones. The argument is then extended to partially renewable resources. Finally, we consider the role of the horizon and of a potential regret after a revision for the bounds. |
| Keywords: | intertemporal allocation, scarce or renewable resources, multiple regimes, discount rates, fairness |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:psewpa:halshs-04916616 |
| By: | Marc Fleurbaey (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Stéphane Zuber (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Suppose that, for whatever reason, it is decided that inequalities within countries are more offensive than inequalities between countries, and that inequalities between populations living together are more offensive than inequalities between generations living in different times. Can a social welfare function express that preference? We show that it is actually difficult to incorporate such a localist preference into a social welfare function, except in a limited way (i.e., from a situation of specific similarity between countries). We also show that in order to obtain such preferences, the relative size of inequality aversion within and between countries may be counter-intuitive in some relevant cases, in the sense that a greater inequality aversion may happen to be required across countries than within countries. This research highlights new social welfare functions that aggregate the outcomes of evaluations over pairs of agents. |
| Keywords: | Inequality aversion, Transfer principle, Within-country preference |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04828805 |
| By: | Nobuyuki Hanaki; Yuta Shimodaira |
| Abstract: | Some researchers claim that a preference for wealth accumulation is the main cause of the long-run stagnation of the Japanese economy. A theoretical implication of people having such a preference, in particular of an assumption that the marginal utility of wealth accumulation has a positive lower bound while that of consumption does not, is the widening of wealth inequality. We experimentally test this theoretical prediction by inducing wealth preference in the laboratory. We found partial support for this prediction without the activation of participants’ status concerns. However, when the status concerns were activated by displaying the accumulated wealth ranking, that wealth inequality widened, especially when the initial inequality was large. These results suggest that status concern is an important reason behind wealth preference. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1260r |
| By: | Spengemann, Marco (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | The pricing kernel is an important tool for understanding asset prices, expected returns, and investor preferences. However, empirical findings often reveal deviations from theoretical predictions, leading to the so-called ”pricing kernel puzzle”. This article explores the pricing kernel under Knightian uncertainty driven by identifiable business cycles. In a pure exchange economy with a representative agent exhibiting smooth ambiguity preferences, the pricing kernel is derived from equilibrium asset prices. By linking normal variance-mean mixtures with model uncertainty, we account for agents facing uncertainty across a continuum of economic regimes. Our results show that the pricing kernel can either decrease monotonically or exhibit a U-shape, depending on the level of ambiguity aversion. Additionally, we provide economic insights into the conditions that give rise to a U-shaped pricing kernel. |
| Keywords: | Pricing kernel, business cycles, normal variance-mean mixture, model uncertainty, identifiability, ambiguity aversion |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:bie:wpaper:700 |
| By: | Eric Bahel (Department of Economics, Virginia Polytechnic Institute and State University); Christian Trudeau (Department of Economics, University of Windsor); Haoyu Wang (Department of Economics, Virginia Polytechnic Institute and State University) |
| Abstract: | We introduce the notion of preconvexity, which extends the familiar concept of convexity found in cooperative games with transferable utility. In a convex game, the larger the group joined by an agent, the larger the marginal value brought to the group by that agent. By contrast, in strictly preconvex games, an agent's marginal contribution is initially decreasing (when joining small groups), and it eventually becomes increasing at (and above) some critical group size. As a consequence, the core of a preconvex game may be empty. Defining the property of semicohesiveness (related to marginal contributions at this critical group size), we prove that it is sufficient to guarantee a nonempty core. We also propose a new solution for the set of preconvex games; and we characterize this solution by combining three axioms which are natural in our framework. A stronger cohesiveness property (guaranteeing that our solution falls in the core) is also studied. Some additional results are provided for the special case of anticonvex games, for which marginal contributions are always non-increasing. |
| Keywords: | cooperation; allocation; core; preconvexity; cohesiveness. |
| JEL: | C71 D63 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2501 |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay); Carmen Camacho (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thai Ha-Huy (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay) |
| Abstract: | In a simple discrete-time version of Lucas (1988) we find that the Balanced Growth Path (BGP) is always the unique optimal planner's solution: with linear or strictly concave production functions, with unbounded utility functions, with or without human capital depreciation. When the "speed" of human capital accumulation is high, the optimal working time is constant and below its upper bound. Capital grows at a constant factor, but degrowth is also possible when this factor is less one (under positive capital depreciation). When this speed is low, optimal working time is at its boundary and capital declines at its depreciation factor (degrowth). |
| Keywords: | Human capital, Balanced growth path |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04805609 |
| By: | Kristian Behrens; Sergei Kichko; Filipp Ushchev |
| Abstract: | Abstract Kimball preferences possess properties that make them a powerful tool for multi-sector applied general equilibrium. While they are homothetic, they also can be made arbitrarily close to constant elasticity of substitution (ces) preferences, thereby sharing some of their properties ‘by continuity'. We develop a trade model which brings together traded and nontraded sectors, variable markups, and costly trade for this rich class of homothetic preferences. We characterize the consequences—for both sectors—of trade liberalization in traded sector. Numerical simulations for a calibrated version of the model reveal that the elasticity of utility with respect to trade costs is about 25%–27%, depending on whether traded and nontrade goods are complements or substitutes. |
| Keywords: | Kimball preferences, monopolistic competition, trade liberalization, variable markups |
| Date: | 2024–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/387756 |
| By: | Geir B Asheim (Department of Economics [Oslo] - Faculty of Social Sciences [Oslo] - UiO - University of Oslo); Kohei Kamaga (Sophia University [Tokyo]); Stéphane Zuber (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We examine utilitarian criteria for evaluating profiles of well-being among infinitely many individuals. Motivated by the non-existence of a natural 1-to-1 correspondence between people when alternatives have different population structures, with a different number of people in each generation, we impose equal treatment in the form of Strong Anonymity. We demonstrate how a novel criterion, Strongly Anonymous Utilitarianism, can be applied in the Ramsey model, leading to an efficient and sustainable stream. We show how the criterion is the result of combining Strong Anonymity with other regularity axioms (Monotonicity, Finite Completeness, and continuity axioms) as well as axioms of equity, population ethics, sensitivity, and separability. We relate it to other strongly anonymous utilitarian criteria. |
| Keywords: | Utilitarianism, Intergenerational equity, Population ethics |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04828788 |
| By: | Paul Duetting; Michal Feldman; Tomasz Ponitka; Ermis Soumalias |
| Abstract: | Algorithmic contract design studies scenarios where a principal incentivizes an agent to exert effort on her behalf. In this work, we focus on settings where the agent's type is drawn from an unknown distribution, and formalize an offline learning framework for learning near-optimal contracts from sample agent types. A central tool in our analysis is the notion of pseudo-dimension from statistical learning theory. Beyond its role in establishing upper bounds on the sample complexity, pseudo-dimension measures the intrinsic complexity of a class of contracts, offering a new perspective on the tradeoffs between simplicity and optimality in contract design. Our main results provide essentially optimal tradeoffs between pseudo-dimension and representation error (defined as the loss in principal's utility) with respect to linear and bounded contracts. Using these tradeoffs, we derive sample- and time-efficient learning algorithms, and demonstrate their near-optimality by providing almost matching lower bounds on the sample complexity. Conversely, for unbounded contracts, we prove an impossibility result showing that no learning algorithm exists. Finally, we extend our techniques in three important ways. First, we provide refined pseudo-dimension and sample complexity guarantees for the combinatorial actions model, revealing a novel connection between the number of critical values and sample complexity. Second, we extend our results to menus of contracts, showing that their pseudo-dimension scales linearly with the menu size. Third, we adapt our algorithms to the online learning setting, where we show that, a polynomial number of type samples suffice to learn near-optimal bounded contracts. Combined with prior work, this establishes a formal separation between expert advice and bandit feedback for this setting. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.14474 |
| By: | Aditi Godbole; Zubin Shah; Ranjeet S. Mudholkar |
| Abstract: | This paper analyzes the 1/3 Financial Rule, a method of allocating income equally among debt repayment, savings, and living expenses. Through mathematical modeling, game theory, behavioral finance, and technological analysis, we examine the rule's potential for supporting household financial stability and reducing bankruptcy risk. The research develops theoretical foundations using utility maximization theory, demonstrating how equal allocation emerges as a solution under standard economic assumptions. The game-theoretic analysis explores the rule's effectiveness across different household structures, revealing potential strategic advantages in financial decision-making. We investigate psychological factors influencing financial choices, including cognitive biases and neurobiological mechanisms that impact economic behavior. Technological approaches, such as AI-driven personalization, blockchain tracking, and smart contract applications, are examined for their potential to support financial planning. Empirical validation using U.S. Census data and longitudinal studies assesses the rule's performance across various household types. Stress testing under different economic conditions provides insights into its adaptability and resilience. The research integrates mathematical analysis with behavioral insights and technological perspectives to develop a comprehensive approach to household financial management. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.15557 |
| By: | Alejandro Gurrola Luna (HSBC Mexico); Stephen McKnight (El Colegio de Mexico) |
| Abstract: | We analyze how bounded rationality affects the equilibrium determinacy properties of forecast-based interest-rate rules in a behavioural New Keynesian model with limited asset market participation (LAMP). We show that the key policy prescriptions of rational expectation models do not carry over to behavioural frameworks with myopic agents. In high participation economies, the Taylor principle is more likely to induce indeterminacy when bounded rationality is introduced following the cognitive discounting approach of Gabaix (2020). Indeterminacy arises from a discounting channel and the problem is exacerbated under flexible prices and nominal illusion. In contrast, cognitive discounting plays a stabilizing role in LAMP economies, where passive policy is no longer required to prevent indeterminacy, and determinacy can potentially be restored under the Taylor principle. We investigate how our results depend on the timing of the interest-rate rule, alternative forms of bounded rationality, and the presence of a cost-channel of monetary policy. |
| Keywords: | Bounded rationality, Cognitive discounting, Equilibrium determinacy, Limited asset markets participation, Taylor principle, Monetary policy |
| JEL: | E31 E32 E44 E52 E71 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:emx:ceedoc:2025-02 |