|
on Utility Models and Prospect Theory |
| By: | Antonio Penta; Larbi Alaoui |
| Abstract: | We revisit the long-lasting debate about the meaning of the utility function used in the standard Expected Utility (EU) model. Despite the common view that EU forces risk aversion and diminishing marginal utility of wealth to be pegged to one another, here we show that this is not the case. Marginal utility for money is an input into risk attitude, but it is not its sole determinant. The attitude towards 'pure risk' is also a contributing factor, and it is independent from the former. We discuss several theoretical implications of this result, for the following topics: (i) non-neutral risk attitudes for profit maximizing firms; (ii) risk-aversion over time lotteries in the presence of discounting; (iii) the equity premium puzzle. We also discuss matters of identification: (i) for firms; (ii) via proxies ; (iii) via standard MLE-methods under parametric restrictions; and (iv) cross-context elicitation in multi-dimensional settings, and its relationship with the methods and results from the psychology literature. |
| Keywords: | Risk Aversion, utility function, marginal utility |
| JEL: | C72 C91 C92 D80 D91 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1494 |
| By: | Hammond, Peter J (University of Warwick) |
| Abstract: | In normative models a decision-maker is usually assumed to be Bayesian rational, and so to maximize subjective expected utility, within a complete and correctly specified decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, as well as Shackle's (1953) concept of potential surprise, we consider enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than a mis-specified model, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider three motivating examples based on: (i) Homer's classic tale of Odysseus and the Sirens; (ii) a two-period linear-quadratic model of portfolio choice; (iii) the game of Chess. Though our novel framework transcends standard notions of risk or uncertainty, for finite decision trees that may be truncated because of bounded rationality, an extended form of Bayesian rationality is still possible, with real-valued subjective evaluations instead of consequences attached to some terminal nodes. Moreover, these subjective evaluations underlie, for example, the kind of Monte Carlo tree search algorithm used by recent chess-playing software packages. |
| Keywords: | Bounded Bayesian rationality ; consequentialist decision theory ; Schumpeterian entrepreneurship ; Shackle's potential surprise ; truncated decision trees ; enlivened decision trees ; subjective evaluation of continuation subtrees ; Monte Carlo tree search. JEL Codes: D11 ; D63 ; D81 ; D91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wcreta:93 |
| By: | Ayush Jha; Abootaleb Shirvani; Ali Jaffri; Svetlozar T. Rachev; Frank J. Fabozzi |
| Abstract: | This paper develops and estimates a multivariate affine GARCH(1, 1) model with Normal Inverse Gaussian innovations that captures time-varying volatility, heavy tails, and dynamic correlation across asset returns. We generalize the Heston-Nandi framework to a multivariate setting and apply it to 30 Dow Jones Industrial Average stocks. The model jointly supports three core financial applications: dynamic portfolio optimization, wealth path simulation, and option pricing. Closed-form solutions are derived for a Constant Relative Risk Aversion (CRRA) investor's intertemporal asset allocation, and we implement a forward-looking risk-adjusted performance comparison against Merton-style constant strategies. Using the model's conditional volatilities, we also construct implied volatility surfaces for European options, capturing skew and smile features. Empirically, we document substantial wealth-equivalent utility losses from ignoring time-varying correlation and tail risk. These findings underscore the value of a unified econometric framework for analyzing joint asset dynamics and for managing portfolio and derivative exposures under non-Gaussian risks. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.12198 |
| By: | Phillips, Lawrence D. |
| Abstract: | Many practitioners consider decision analysis as a sociotechnical discipline, with probability, utility, and trade-offs as the core components of a model that enables an accountable decision maker experiencing a sense of unease about the present to explore different assumptions about the future and develop a plan about the way forward for the organization. The decision analyst acts as a process consultant, working with the decision maker and key players as a problem solver and applying any of five structural and five content ingredients of decision analysis in building a requisite model that is sufficient in form and content to resolve the problem while acting as a transitional object, which holds and contains the decision maker’s unease and anxiety about the future. Ten social skills that enable the decision analyst to serve as a process consultant are explained. Six case studies representing problem types for evaluating options, allocating resources, bargaining and negotiating, choosing and deciding, managing risk, and revising opinion demonstrate the many ways that their acting as a transitional object enables exploring the future. Funding: This work was supported by Facilitations Ltd. |
| Keywords: | decision analysis models; requisite models; transitional objects; decision conferences; process consultancy skills; preferences; judgements |
| JEL: | J50 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128662 |
| By: | Anke D. Leroux (Department of Economics, Monash University, Caulfield East, Victoria 3145, Australia.); Vance L. Martin (Department of Economics, The University of Melbourne, Parkville, Victoria 3010, Australia (retired).) |
| Abstract: | Food security lags economic development, raising questions about whether food insecure households can leverage local economic development and livelihood diversif ication opportunities as effectively as their food secure counterparts. In a dynamic model incorporating production and utility risk, household consumption and livelihood portfolios depend on vulnerability, described by proximity to their stochastic minimum consumption threshold. Using granular data on smallholder farmers’ livelihood choices, the threshold effect is significant, with approximately 25% of household wealth allocated to satisfying the consumption threshold. Costly income smoothing strategies are most prevalent among the vulnerable and food insecure. However, results show that popular programs targeting livelihood diversification benefit primarily food secure households. In contrast, food safety net programs that directly reduce vulnerability carry the largest livelihood diversification benefits for food insecure households. These findings highlight the importance of reducing vulnerability to food insecurity, as it hinders smallholder farmers from accessing high-value market opportunities. |
| Keywords: | food security, household portfolio choice, GMM, livelihoods, SDG2 |
| JEL: | O13 G11 Q12 D81 Q18 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:mos:moswps:2025-11 |
| By: | Tom Barkin |
| Abstract: | Even as overall labor market conditions have loosened over the past year, employers in the skilled trades continue to report a lack of available workers. Community colleges seem to be the utility player of workforce development, able to fill a role at every stage of the talent pipeline. However, they face considerable skepticism around their effectiveness. Community colleges have historically been evaluated with the same metric as four-year institutions. In 2022, we launched a pilot of our Survey of Community College Outcomes to produce a more comprehensive metric of community college success that accounts for a broader number of students and outcomes. A community college succeeds when it provides its local area with what it needs. Our success rate allows for that. |
| Keywords: | economic growth |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:r00034:101224 |
| By: | Annette Alstadsæter (NMBU); Matthew Collin (EU Tax Observatory); Bluebery Planterose (EU Tax Observatory); Gabriel Zucman (EU Tax Observatory); Andreas Økland (NMBU) |
| Abstract: | This note presents new evidence on the scale of foreign investment in the Dubai residential property market. Using new data comprising the ownership of a large share of the Dubai property market, we present updated estimates of foreign-owned real estate for the years 2020 and 2022. We find that foreign nationals hold around 43% of the total value of all residential property in the city. Foreign-owned residential real estate grew by 20%—around $23 billion—between the beginning of 2020 and early 2022. We also find evidence of a substantial boom in Russian interest in the city following the invasion of Ukraine, with both utility accounts and residential leases associated with Russian nationals increasing sharply. Relying on simple assumptions to allocate new property purchases across nationalities, we conservatively estimate that Russians bought up to $2.4 billion worth of existing properties and a further $3.9 billion of in-development properties since the invasion. |
| Keywords: | Foreign real estate ownership, money laundering, global asset registry |
| JEL: | H26 F38 R31 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:plnote:010 |