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on Utility Models and Prospect Theory |
| By: | Ayush Gupta |
| Abstract: | This paper establishes a general existence result for expected utility maximization in settings where the agent's decision affects the uncertainty faced by her. We introduce a continuity condition for choice-dependent probability measures which ensures the upper semi-continuity of expected utility. Our topological proof imposes minimal restrictions on the utility function and the random variable. In particular, we do not need common assumptions like the monotone likelihood ratio property (MLRP) or the convexity of distribution functions condition (CDFC). Additionally, we identify sufficient conditions - continuity of densities and stochastic dominance - which help verify our assumptions in most practical applications. These findings expand the applicability of expected utility theory in settings with endogenous uncertainty. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.06846 |
| By: | Giuseppe De Marco (University of Naples Parthenope and CSEF); Maria Romaniello (Università degli Studi della Campania Luigi Vanvitelli.); Alba Roviello (University of Napoli Federico II) |
| Abstract: | We analyze the effects of guilt aversion in the Battle of Sexes game by exploiting the theory of psychological games and the concept of psychological Nash equilibrium. Then we examine the impact of ambiguity in the (second-order) beliefs by taking into account the theory of psychological games under ambiguity. Our results show that the sensitivity to guilt affects some equilibrium of the game since a player might be willing to accept a lower expected utility to compensate the otherÕs disutility from guilt. Ambiguity, in turn, makes this effect more evident as it makes it greater the disutility from guilt. |
| Keywords: | Battle of sexes, guilt aversion, psychological games, maxmin preferences. |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:741 |
| By: | Aleksandra Conevska; Can Mutlu |
| Abstract: | In this paper, we address a longstanding puzzle over the functional form that better approximates voter utility from political choices. Though it has become the norm in the literature to represent voter utility with concave loss functions, for decades scholars have underscored this assumption’s potential shortcomings. Yet there exists little to no evidence to support one functional form assumption over another. We fill this gap by first identifying electoral settings where the different functional forms generate divergent predictions about voter behavior. We then assess which functional form better matches observed voter and abstention behavior using Cast Vote Record (CVR) data that captures the anonymized ballots of millions of voters in the 2020 U.S. general election. Our findings indicate that concave loss functions fail to predict voting and abstention behavior, and it is the reverse S-shaped loss functions, such as the Gaussian function, that better match observed voter behavior. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:not:notnic:2025-02 |
| By: | Guanxing Fu; Ulrich Horst |
| Abstract: | We study mean field portfolio games under Epstein-Zin preferences, which naturally encompass the classical time-additive power utility as a special case. In a general non-Markovian framework, we establish a uniqueness result by proving a one-to-one correspondence between Nash equilibria and the solutions to a class of BSDEs. A key ingredient in our approach is a necessary stochastic maximum principle tailored to Epstein-Zin utility and a nonlinear transformation. In the deterministic setting, we further derive an explicit closed-form solution for the equilibrium investment and consumption policies. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.07231 |
| By: | Ryota IWAMOTO; Takunori ISHIHARA; Takanori IDA |
| Abstract: | This study empirically investigates the differences in risk preferences and loss aversion between humans and generative AI. We conduct a nationwide online survey of 4, 838 individuals and generate AI responses under identical conditions by using personas constructed from demographic attributes. The results show that in gain domains, both humans and the AI select risk-averse options and exhibit similar preference patterns. However, in loss domains, AI shows a stronger risk-loving tendency and responds more sharply to individual attributes such as gender, age, and income. We retrain the AI by fine-tuning it based on human choice data. After fine-tuning, the AI’s preference distribution moves closer to that of humans, with loss-related decisions showing the greatest improvement. Using Wasserstein distance, we also confirm that fine-tuning reduces the behavioral gap between AI and humans. |
| Keywords: | bias, bias, loss aversion, risk preference, generative AI, persona, fine-tuning, Wasserstein distance |
| JEL: | D91 C91 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:kue:epaper:e-25-006 |
| By: | Léa Marchal (Université Paris 1 Panthéon-Sorbonne, CNRS, Centre d'Economie de la Sorbonne); Claire Naiditch (Université Lille, CNRS, IESEG School of Management, LEM; Institut Convergences Migrations); Betül Simsek (Institute of Law and Economics - Hamburg University) |
| Abstract: | Foreign aid is often promoted as a way to curb emigration by improving welfare in countries of origin. However, the effectiveness of such a policy remains debated. To contribute to this debate, we develop a random utility maximisation model yielding a gravity equation, which we estimate using OECD migration and aid data for 2011-2019. We exploit the differences between bilateral aid and multilateral aid, for which donors are masked, to isolate the donor-specific and non-donor-specific effects of aid on migration. We show that aid increases rather than reduces migration. The donor-specific channel plays a dominant role in explaining this positive effect, which is primarily conveyed through an information channel |
| Keywords: | Aid; gravity; migration; RUM |
| JEL: | F22 F35 O15 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:25015 |
| By: | Olivier J. Blanchard |
| Abstract: | This year marks the 40th anniversary of the NBER Macro Annual Conference, founded in 1986. This paper reviews the evolution of mainstream macroeconomics since then. It presents my views, informed by a survey of a number of researchers who have made important contributions to the field. I develop two main arguments. The first is that, starting from strikingly different positions, there has been substantial convergence, in terms of methodology, architecture, and main mechanisms. Methodology: Explicit micro foundations, explicit treatment of distortions, with, at the same time, an increased willingness to deviate from rational expectations, neoclassical utility and profit maximization. Architecture: The wide acceptance of nominal rigidities as an essential distortion, although with mixed feelings. Mechanisms: The wide nature of the shocks to both the demand and the supply side. The second is that this convergence has been, for the most part, good convergence, i.e. the creation of a generally accepted conceptual and analytical structure, a core to which additional distortions can be added, allowing for discussions and integration of new ideas and evidence, rather than fights about basic methodology. Not everything is right however, with too much emphasis on general equilibrium implications from the start, rather than, first, on partial equilibrium analysis of the phenomenon at hand. The appendix to the paper gives a sample of the views of the members of the survey on each of these arguments. |
| JEL: | E0 E10 E20 E30 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33802 |
| By: | Raphaelle G. Coulombe; James McNeil (Department of Economics, Dalhousie University) |
| Abstract: | We study the term structure of interest rates in an endowment economy with noisy information and CRRA preferences. Exogenous prices and consumption consist of both temporary and permanent components, but the household observes only their aggregate values. We show that on average the term spread in this environment is positive and on a scale close to what we observe in the data, a fact that many existing macroeconomic models struggle to reproduce without very large coefficients of relative risk aversion. In our partial-information framework, uncertainty about the decomposition of the endowment and prices into their temporary and permanent components combined with a negative correlation in consumption growth explain why the slope of the yield curve is positive on average. We estimate our model using Bayesian methods and US data from 1961–2007 and find that the average interest rate spread is 0.85%, compared with 0.98% in the data. Further, we estimate a coefficient of relative risk aversion of only 4.86. Noisy information accounts for 44% of the scale of the term premium, with the remainder principally explained by real activity and nominal factors playing only a small role. |
| Keywords: | term premium; yield curve; information frictions; Bayesian estimation |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:dal:wpaper:daleconwp2025-01 |
| By: | Riccardo Manghi (LUISS Guido Carli University); Daniela Di Cagno (LUISS Guido Carli University) |
| Abstract: | This study investigates individual differences in catastrophic risk perception using Cumulative Prospect Theory (CPT) through a laboratory experiment. The choice of CPT allows us to introduce a basic "addendum" to traditional EUT evaluations of these kinds of risks. We analyze the drivers of risk perception through a laboratory measure of CPT based on experimental data, where possible drivers include sociodemographic factors, psychological characteristics, and psychometric variables such as past experience. We define in this setting an interesting aspect that is a peculiar characteristic of extreme risks: the so-called shared burden effect, where individuals perceive the same risks as less severe if they affect a larger share of the collectivity. External validity is provided by examining whether laboratory-elicited risk perception predicts real-world extreme risk assessments. |
| Keywords: | risk perception, catastrophic risk, prospect theory, experimental economics, shared burden effect |
| JEL: | D81 C91 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:605 |