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on Utility Models and Prospect Theory |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We consider Pareto optimal risk sharing between a buyer and a seller of insurance contracts, as well as consumption substitution and saving in a two-period context. The separation of the time periods allows us to consider the substitution effect. We show that the classical result of Pareto optimal risk sharing between a customer and an insurer is robust, and remains so also with recursive utility. For both expected utility and recursive utility we obtain precautionary savings with prudence. With recursive utility we identify the connection between the coefficient of elasticity of substitution in consumption and optimal saving, both under certainty and uncertainty. The separation of consumption substitution from risk aversion is shown to be partial. |
| Keywords: | Pareto optimal risk sharing; two-period models; recursive utility; consumption substitution; separation; precautionary savings |
| JEL: | G00 G22 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_007 |
| By: | Franz Dietrich (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, Paris School of Economics, CNRS) |
| Abstract: | Ever since the Harsanyi-Sen debate, it is controversial whether someone's welfare should be measured by her von-Neumann-Morgenstern (VNM) utility, for instance when analysing welfare intensity, social welfare, interpersonal welfare comparisons, or welfare inequality. We prove that natural working hypotheses lead to a di¤erent welfare measure. It addresses familiar concerns about VNM utility, by faithfully capturing non-ordinal welfare features such as welfare intensity, despite resting on purely ordinal evidence such as revealed preferences or self-reported welfare comparisons. Using this welfare measure instead of VNM utility alters social welfare analysis for instance, Harsanyi's 'utilitarian theorem' now effectively supports prioritarianism. VNM utility is shown to be a hybrid object, determined by an interplay of two factors: welfare and attitude to intrinsic risk, i.e., to risk in welfare rather than outcomes |
| Keywords: | welfare; utility; social welfare; utilitarianism; Harsanyi-Sen debate |
| JEL: | D00 D60 D63 D69 D70 D80 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:25003 |
| By: | Bowen-Hill, Oscar |
| Abstract: | Decision making is an important and varied part of everyday life. There are many things that contribute to how a decision is made, from personal bias to the way our expectations alter our circumstances these evaluations change from person to person. Subjective expected utility has become a general rationalisation of decision making: the options picked are the ones perceived as most likely to take us closest to, if not achieve, our goals. This investigation challenges this. This investigation was two-fold. Firstly, it combined a framework of established decision- making factors into a Behavioural Utility Profile (BUP) which could be used to predict different individuals’ ages. Created and evaluated by a Machine Learning ‘Random Forest regression’ tool, this profile was found to be effective, indicating that the BUP represented a reliable profile for influences of decision making, and that how this profile is structured changes with age. Finally, with a specially designed Subjective Expected Futility taskset, the investigation reasoned that decision making rationale are changing. Instead of approaching goals with an ‘achieve the best outcome’ methodology, the investigation found that the context in which participants made decisions altered choices to present a shorter-term approach: ‘Seek flexibility. Choose shorter-term’. |
| Date: | 2023–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:v29p7_v1 |
| By: | Heifetz, Aviad; Peña, Jorge |
| Abstract: | In the standard continuous-time choice-taking gradient dynamics in smooth two-player games, each player implicitly assumes that their opponent momentarily main-tains their last choice. Contrastingly, in the utility-taking gradient dynamics each player implicitly assumes that their opponent momentarily maintains their utility level, by marginally adjusting their choice to that effect. Somewhat surprisingly, employing a transversality argument we find that, in an open and dense set of smooth games, this dynamics is undefined at Nash equilibria. This occurs because, at a Nash equilibrium, the opponent’s indifference curve is not locally a function of one’s own strategy, mak-ing it impossible to specify an opponent’s adjustment that would maintain their utility in response to one’s own marginal deviation from Nash behavior. Furthermore, when approaching a Nash equilibrium of such a generic game, the utility-taking gradient dy-namics either accelerates without bound towards the equilibrium or diverges away from it with unbounded speed. |
| Keywords: | gradient dynamics |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130433 |
| By: | Dietzenbacher, Bas (RS: GSBE other - not theme-related research, QE Math. Economics & Game Theory); Vermeulen, Dries (RS: GSBE other - not theme-related research, QE Math. Economics & Game Theory, RS: GSBE MCM) |
| Abstract: | For communication situations where the communication possibilities of players are modeled by an undirected graph, we study to what extent Myerson’s graph-restricted game inherits properties from the original transferable utility game. We focus on monotonicity, additivity, superadditivity, convexity, imputation admissibility, balancedness, total balancedness, population monotonic allocation schemes, and exactness. For each of these properties, we characterize all communication graphs that guarantee the inheritance. We present existing results from the literature and we provide new results. |
| JEL: | C71 |
| Date: | 2025–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:unm:umagsb:2025003 |
| By: | Alfonso Maselli (University of Pennsylvania) |
| Abstract: | We study a decision maker who approaches an uncertain decision problem by formulating a set of plausible probabilistic models of the environment but is aware that these models are only stylized and incomplete approximations. The agent is effectively facing two layers of uncertainty. Not only is the decision maker uncertain regarding what model in this set has the best fit (model ambiguity), but she is also concerned that the best-fit model itself might be a poor description of the environment (model misspecification). We develop an axiomatic foundation for a general class of preferences that capture concern toward these two layers of uncertainty and allow us to compare individuals’ degrees of aversion to model misspecification and model ambiguity independently of each other. |
| Date: | 2025–04–04 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:25-010 |
| By: | Mathieu Guigourez (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | Individual actions – and individual responsibility – in regard to climate-related issues are often overlooked because they have a negligible impact at the global scale. Yet, despite having little to no impact, some people commit themselves to reducing their carbon footprint; that is, they are willingly choosing to adapt their consumption despite having no tangible impact on the issue they are tackling. Our aim is to question the permeability of economic rationality with moral (individual) responsibility at stake in climate-related issues. We provide an account of a possible bridge between deontological obligations and utility-maximisation in three different frameworks, namely Senian commitment, Kantian economics and choice under unresolved valuations conflicts. This analysis of different frameworks incorporating deontological motives in Rational Choice Theory analytically grounds individual commitments without relying on political enforcements or monetary incentives |
| Keywords: | Rational Choice Theory; Amartya Sen; Individual Responsibility; Kantian Economics; Normative Uncertainty; Commitment; Climate Ethics; Normative Decision Theory |
| JEL: | B41 D01 D72 D81 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:25002 |
| By: | Narvin 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, e.g., in cheaptalk games. 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. |
| Keywords: | single crossing; incentive compatibility; mechanism design; cheap talk |
| JEL: | D82 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_676 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a unified framework linking subjective preferences, stock market behavior, and quantum neuroscience, arguing that financial decision-making originates in quantum cognitive processes rather than classical neural determinism. Preferences, judgments, and ideas are modeled as quantum states evolving within a cognitive Hilbert space, governed by a preference Hamiltonian. These quantum states—subject to superposition, tunneling, entanglement, and uncertainty—explain why investor behavior is inherently probabilistic, context-dependent, and often non-rational. Market prices emerge as observable outcomes of wavefunction collapse across interacting agents, while crashes and bubbles are modeled through quantum tunneling and collective decoherence. We derive a quantum uncertainty principle showing that evaluation volatility and risk perception are fundamentally bounded. Anomalies observed in behavioral and experimental economics, including framing effects and preference reversals, are explained through non-commuting cognitive operators and dynamic, operator-valued utilities. This framework reinterprets market irrationality as a natural consequence of quantum consciousness and provides a rigorous, empirically consistent theory of financial behavior. |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:752 |
| By: | Kym Pram; Burkhard C. Schipper (Department of Economics, University of California Davis) |
| Abstract: | We study the design of efficient mechanisms under asymmetric awareness and information. Unawareness refers to the lack of conception rather than the lack of information. Assuming quasi-linear utilities and private values, we show that we can implement in conditional dominant strategies a social choice function that is utilitarian ex-post efficient when pooling all awareness of all agents without the need of the social planner being fully aware ex-ante. To this end, we develop novel dynamic versions of Vickrey-Clarke-Groves mechanisms in which types are revealed and subsequently elaborated at endogenous higher awareness levels. We explore how asymmetric awareness affects budget balance and participation constraints. We show that ex-ante unforeseen contingencies are no excuse for deficits. Finally, we propose a modified reverse second price auction for efficient procurement of complex incompletely specified projects. |
| Keywords: | dynamic mechanism design, VCG mechanisms, auctions versus negotiations, unknown unknowns, complex projects |
| JEL: | D83 |
| Date: | 2025–04–05 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:372 |