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on Utility Models and Prospect Theory |
| By: | Thomas Dohmen; Georgios Gerasimou |
| Abstract: | We ask if participants in a choice experiment with repeated presentation of the same menus and no feedback provision: (i) learn to behave in ways that are closer to the predictions of ordinal and expected utility theory under strict preferences; or (ii) exhibit overall behaviour that is consistent with utility theory under weak preferences. To answer these questions we design and implemented a free-choice lab experiment with 15 distinct menus. Each menu contained two, three and four lotteries with three monetary outcomes, and was shown five times. Subjects were not forced to make an active choice at any menu but could avoid/defer doing so at a positive expected cost. Among our 308 subjects from the UK and Germany, significantly more were ordinal- and expected-utility maximizers in their last 15 than in their first 15 identical decision problems. Around a quarter and a fifth of all subjects, respectively, decided in those modes throughout the experiment, with nearly half revealing non-trivial indifferences. A considerable overlap is found between those consistently rational individuals and the ones who satisfied core principles of random utility theory. Finally, choice consistency is positively correlated with cognitive ability, while subjects who learned to maximize utility were more cognitively able than those who did not. We discuss potential implications of our study’s novel set of findings. |
| Keywords: | Ordinal utility; expected utility; learning; indifference; avoidance/deferral; cognitive ability. |
| JEL: | D01 D81 D83 D91 C91 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_687 |
| By: | Tanay Raj Bhatt |
| Abstract: | In a typical model of private information and choice under uncertainty, a decision maker observes a signal, updates her prior beliefs using Bayes rule, and maximizes her expected utility. If the decision maker's utility function satisfies the single crossing property, and the information structure is ordered according to the monotone likelihood ratio, then the comparative statics exhibit monotonicity with respect to signals. We consider the restrictions placed by this model of signal processing on state conditional stochastic choice data. In particular, we show that this model rationalizes a state conditional stochastic choice dataset if and only if the dataset itself is ordered according to the monotone likelihood ratio. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.03985 |
| By: | Henrique de Oliveira; Rohit Lamba |
| Abstract: | An analyst observes an agent take a sequence of actions. The analyst does not have access to the agent's information and ponders whether the observed actions could be justified through a rational Bayesian model with a known utility function. We show that the observed actions cannot be justified if and only if there is a single deviation argument that leaves the agent better off, regardless of the information. The result is then extended to allow for distributions over possible action sequences. Four applications are presented: monotonicity of rationalization with risk aversion, a potential rejection of the Bayesian model with observable data, feasible outcomes in dynamic information design, and partial identification of preferences without assumptions on information. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.05251 |
| By: | Michael Cuna; Lenka Fiala; Min Sok Lee; John A. List; Sutanuka Roy |
| Abstract: | Understanding the role of preferences, beliefs, and constraints on social and wealth inequities is a key unlock for economic growth. This study focuses on the inter-relationship between risk and ambiguity preferences of mothers, their early childhood investments, and their children’s outcomes. To do so, we elicit ambiguity attitude and risk aversion preference parameters from more than 6000 randomly sampled mothers from nearly 500 villages in Rajasthan, India. Across several measures of mothers’ investment in nutrition of their children between the ages of 0-6, we find a robust and stable positive correlation of estimated ambiguity attitude and risk aversion parameters with maternal investments: the more risk and ambiguity averse the mother, the greater her investments. Such investments are correlated with better children’s cognitive and non-cognitive skills, as mothers with greater risk and ambiguity aversion have children with superior skills, even after accounting for socio-economic differences. Importantly, the positive effect of ambiguity and risk aversion on early-life outcomes can attenuate the negative impact of proxies of socio-economic disadvantage, such as illiteracy of the mothers, belonging to historically discriminated social groups, no exposure to radio, television, or zero access to mobile phones for all measures of cognitive and non-cognitive early-life skills. |
| JEL: | D91 I14 I15 I24 J13 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33610 |
| By: | Alistair Macaulay (University of Surrey); Chenchuan Shi (University of Oxford) |
| Abstract: | This paper studies how wealth and aging affect portfolio choices in a life-cycle model with ambiguity aversion. Ambiguity aversion implies that wealthier and older agents are endogenously more optimistic about risky asset returns, relative to poorer younger agents. As life expectancy grows, old agents become even more optimistic, while young agents become more pessimistic, amplifying the age gaps in portfolio composition, and implying further increases in intergenerational inequality. We find evidence for the mechanism in survey data on portfolios and subjective life expectancy. In a quantitative extension of the model, plausible life expectancy projections imply a 26% increase in the age-gradient of conditional risky asset shares between 2019 and 2100. |
| JEL: | D84 E21 G11 J11 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0425 |
| By: | Capra, C. Monica (Claremont Graduate University); Kniesner, Thomas J. (Claremont Graduate University) |
| Abstract: | Nobel Prize winner Daniel Kahneman's last published paper is an adversarial collaboration in which he and Matthew Killingsworth reconcile conflicting empirical results from their previous research on income and reported happiness, with Barbara Mellers as a facilitator. The empirical results use quantile regression to allow for measured income heterogeneity effects that include notch points in the estimated marginal utilities of income. Our analysis examines Kahneman's last paper's conceptual innovations and challenges to assumptions about diminishing marginal utility of income. We review his contributions to emotional well-being measurement and employ a novel AI-simulated dialogue between the late Amos Tversky and Sir Angus Deaton to explore interdisciplinary perspectives on the findings. Our paper demonstrates how Kahneman's final research undermines recent arguments for incorporating income redistribution simply into benefit-cost analysis, suggesting that such objectives remain better addressed through fiscal policy rather than regulatory interventions. His final published work exemplifies Kahneman's commitment to empirical precision and theoretical flexibility, even when contradicting his earlier conclusions. |
| Keywords: | marginal utility, quantile regression, adversarial collaboration, well-being, income satiation, social welfare weights, simulated dialogue with AI |
| JEL: | D12 D61 H23 I31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17841 |
| By: | Florian Mudekereza |
| Abstract: | This paper analyzes a society composed of individuals who have diverse sets of beliefs (or models) and diverse tastes (or utility functions). It characterizes the model selection process of a social planner who wishes to aggregate individuals' beliefs and tastes but is concerned that their beliefs are misspecified (or distorted). A novel impossibility result emerges: a utilitarian social planner who seeks robustness to misspecification never aggregates individuals' beliefs but instead behaves systematically as a dictator by selecting a single individual's belief. This tension between robustness and aggregation exists because aggregation yields policy-contingent beliefs, which are very sensitive to policy outcomes. Restoring possibility of belief aggregation requires individuals to have heterogeneous tastes and some common beliefs. This analysis reveals that misspecification has significant economic implications for welfare aggregation. These implications are illustrated in treatment choice, asset pricing, and dynamic macroeconomics. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.07401 |
| By: | Kym Pram; Burkhard C. Schipper |
| 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. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04382 |
| By: | Anand, Vaibhav |
| Abstract: | Forecasts play a key role in guiding short-term adaptations--from pre-treating roads before snow to evacuating people before hurricanes. However, it is unclear how improvements in forecast skill should shape optimal adaptation. I develop a theoretical model for forecast-based prevention and provide three key insights. First, better forecasts lead to higher, yet less frequent, adaptation investments. Second, risk preferences matter less as improved forecasts resolve more uncertainty. Third, the average adaptation declines for highly risk-averse decision-makers but may rise for less risk-averse ones. These findings highlight the need to align resource allocation and planning with forecast skill, especially given varying levels of trust in forecasts. |
| Date: | 2025–03–14 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:tvwhz_v2 |
| By: | Högn, Celina (affiliation not available); Mayer, Lea (affiliation not available); Rincke, Johannes (University of Erlangen-Nuremberg); Winkler, Erwin (University of Erlangen-Nuremberg) |
| Abstract: | This paper examines preferences for gender diversity among co-workers. Using stated-choice experiments with 5, 400 PhD students and university students in Germany, we uncover a substantial willingness to pay (WTP) for gender diversity of up to 5% of earnings on average. Importantly, we find that women have a much higher WTP for gender diversity than men. While the WTP differs by career ambition, competitiveness, and family preferences, we find that gender differences in traits and preferences cannot explain gender differences in the WTP for diversity. Our findings provide an explanation for differential sorting of men and women into high-profile jobs based on the share of female co-workers. |
| Keywords: | gender differences, preferences, willingness to pay, stated choice experiment, gender diversity |
| JEL: | J16 J24 J31 J33 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17750 |