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on Utility Models and Prospect Theory |
| By: | Guanxing Fu (The Hong Kong Polytechnic University); Ulrich Horst (Humboldt University Berlin) |
| 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. |
| Keywords: | epstein-zin utility; mean field game; stochastic maximum principle; |
| Date: | 2025–07–27 |
| URL: | https://d.repec.org/n?u=RePEc:rco:dpaper:540 |
| By: | Dillenberger, David; Gottlieb, Daniel; Ortoleva, Pietro |
| Abstract: | We study how the separation of time and risk preferences relates to a property called Stochastic Impatience. We show that, within a broad class of models, Stochastic Impatience holds if and only if risk aversion and the inverse elasticity of intertemporal substitution are sufficiently close. In the models of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for commonly used parameters. Our result also provides a simple, one-question test for the separation of time and risk preferences. |
| Keywords: | stochastic impatience; Epstein-Zin preferences; separation of time and risk preferences; risk sensitive preferences; non-expected utility |
| JEL: | D81 D90 G11 |
| Date: | 2025–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125994 |
| By: | Alessandro Spiganti (University of Genoa); Francesco Trevisan (Ca' Foscari University of Venice) |
| Abstract: | We provide a micro-founded dynamic framework to analyse the effects of inequality on social competition, mobility, and welfare. We consider an infinitely repeated Tullock contest in which players with concave utility allocate resources between consumption and costly effort, and the prizes from the current competition determine the players' endowments in the subsequent period. We characterize the unique pure-strategy Markov Perfect Equilibrium, proving that the highly endowed player exerts more effort and has a higher probability of winning. Social competition is maximized at an intermediate level of inequality, whereas utilitarian social welfare is maximized under full equality. Assuming non-increasing absolute risk aversion preferences, we find that greater inequality monotonically reduces social mobility (a pattern consistent with the Great Gatsby curve) and lowers the welfare of the lowly endowed player. By contrast, the welfare of the highly endowed player is non-monotonic when the discount factor is sufficiently high. Thus, being richer in a more unequal society does not necessarily imply higher individual welfare. For example, under logarithmic utility and beta = 2/3, an individual must control over 88% of total resources to strictly prefer inequality over full equality. |
| Keywords: | Contests, Social Competition, Social Mobility, Great Gatsby curve |
| JEL: | D63 D82 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ven:wpaper:2025:09 |
| By: | Bas Donkers; Kamel Jedidi; Miłosz Kadziński; Mohammad Ghaderi |
| Abstract: | We introduce the Random Preference Model (RPM), a non-parametric and flexible discrete choice model. RPM is a rank-based stochastic choice model where choice options have multi-attribute representations. It takes preference orderings as the main primitive and models choices directly based on a distribution over partial or complete preference orderings over a finite set of alternatives. This enables it to capture context-dependent behaviors while maintaining adherence to the regularity axiom. In its output, it provides a full distribution over the entire preference parameter space, accounting for inferential uncertainty due to limited data. Each ranking is associated with a subspace of utility functions and assigned a probability mass based on the expected log-likelihood of those functions in explaining the observed choices. We propose a two-stage estimation method that separates the estimation of ranking-level probabilities from the inference of preference parameters variation for a given ranking, employing Monte Carlo integration with subspace-based sampling. To address the factorial complexity of the ranking space, we introduce scalable approximation strategies: restricting the support of RPM to a randomly sampled or orthogonal basis subset of rankings and using partial permutations (top-k lists). We demonstrate that RPM can effectively recover underlying preferences, even in the presence of data inconsistencies. The experimental evaluation based on real data confirms RPM variants consistently outperform multinomial logit (MNL) in both in-sample fit and holdout predictions across different training sizes, with support-restricted and basis-based variants achieving the best results under data scarcity. Overall, our findings demonstrate RPM's flexibility, robustness, and practical relevance for both predictive and explanatory modeling. |
| Keywords: | choice models, context-dependent preference, nonparametric modeling, random utility, rankings |
| JEL: | C35 C14 C15 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1502 |
| By: | Tasnádi, Attila; Puppe, Clemens |
| Abstract: | In many professional activities humans are getting better generation by generation. This is supposed to be the case, for instance, in sports and in science. Is it true in the arts? In this paper, we consider violinists from the time period in which audio and video recordings became possible. Based on the number of YouTube views, and by employing different aggregation methods, we find that listening to violinists from the mid of the previous century does not seem to be significantly less attractive to audiences than listening to contemporary violinists. Methodologically, our analysis contributes to the growing literature on the aggregation of incomplete lists. In particular, we introduce a generalization of the Nash collective utility function for incomplete lists. |
| Keywords: | group decisions and negotiations, multi-criteria decision making, aggregation of incomplete lists, Nash collective utility function, top violinists |
| JEL: | D71 |
| Date: | 2025–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:cvh:coecwp:2025/01 |
| By: | Kitamura, Kazuhito |
| Abstract: | This paper challenges traditional economics' reliance on Adam Smith's "invisible hand" and its assumption of equilibrium derived from nominal variables, arguing that this hinders economists' understanding of modern economies. It proposes "dynamic equilibrium, " where stability arises from interactions between agents' internal characteristics and external factors. A key equation derived from the paper is "R_t-ρ=n+D_a-(U_(θa)θ)/U_c". Its left-hand side, the discrepancy between asset return (R_t) and time preference rate (ρ), is balanced by two forces on the right-hand side: retaining capital within the economy (the marginal utility of assets compared to consumption) and promoting its diffusion and dilution (capital outflow (D_a) and population growth (n)). That suggests that if time preference is an inherent trait, economies with a lower time preference will have a funds surplus, but this will be partially offset by capital outflow or a weak asset preference, so the decline in the real interest rate will be limited, and vice varsa. The paper argues that while conventional economics has focused on the left-hand side of this equation, understanding the right-hand side is crucial. This mechanism will be able to pragmatically explain various modern economic phenomena through the immobilization of the relations between debtor and creditor even when agents are rational and markets are efficient : for example, long-term global imbalances, deflationary equilibrium in developed economies, and inequalities of income and assets and so on. Ultimately, the paper reinterprets modern economic disequilibrium as a result of rational agent behavior, offering insights for more effective macroeconomic policy. |
| Keywords: | dynamic equilibrium; time preference; asset preference; capital flows; global imbalance |
| JEL: | C50 C62 D00 D50 F02 F61 R13 |
| Date: | 2025–07–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125537 |
| By: | Zijian Zark Wang |
| Abstract: | When decision makers evaluate a sequence of rewards, they may pay more attention to larger rewards and, given attention is limited, less attention to smaller rewards. They may also become less attentive to each reward when attention is spread over a longer period of time. Such reductions in attention could lead to greater discounting of the rewards' values. This paper introduces a novel theory of time discounting based on these assumptions. The resulting discount factors in the theory follow a distribution similar to the multinomial logit function. We characterize such discount factors using two approaches: one based on information maximizing exploration and the other based on the optimal discounting framework. The theory can explain a wide range of anomalies, including the hidden-zero effect, S-shaped value function, and intertemporal correlation aversion. Also, it specifies new mediators for some well-known psychological effects, such as the common difference effect, risk aversion over time lotteries, and the present bias. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.13016 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a novel institution-based asset pricing model to address the longstanding equity premium puzzle within the context of OECD economies. We endogenize institutional quality -- capturing property rights, rule of law, and political stability -- as a capital-like state variable subject to stochastic shocks, depreciation, and investment. Building on recursive utility and production-based frameworks, we derive the stochastic discount factor (SDF) and demonstrate how institutional volatility amplifes consumption risk and increases equity premia. Our analytical results and numerical simulations show that economies with stronger and more stable institutions exhibit lower risk premia and smoother asset returns, while institutional uncertainty generates excess volatility and persistent return differentials. Empirical proxies -- including political risk indices, rule-of-law scores, and policy uncertainty measures -- confirm the model's predictions across OECD stock markets. This approach not only helps resolve the equity premium puzzle but also highlights the macro financial significance of investing in and protecting institutional capital. |
| Keywords: | Institutional asset pricing, equity premium puzzle, stochastic discount factor, rule of law, political risk, institutional capital, OECD economies, recursive utility, production-based model, global financial stability |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:775 |
| By: | Heng-fu Zou (IAS; Wuhan University; World Bank) |
| Abstract: | Standard asset pricing models, whether consumption-based (CCAPM) or production-based (PCAPM), treat institutions-such as property rights, contract enforcement, and rule of law-as exogenous, stable, and frictionless. This assumption collapses under empirical scrutiny in a world where institutional deterioration, geopolitical conflict, and strategic coercion shape both economic fundamentals and financial markets. We develop a new framework of Institution- Based Asset Pricing (IBAP) in which institutions are modeled as a dynamic, investable capital stock. Agents optimally allocate resources not only to con sumption and physical capital, but also to institutional investment, which sustains enforcement mechanisms and mitigates systemic risk. Institutional quality enters both the production function and the utility function, directly affecting the stochastic discount factor and asset risk premia. Our model explains fundamental differences in asset pricing mechanisms across political regimes for instance, between China's extractive, state-controlled financial system and the liberal, rules-based system of the United States. We show that shocks to institutional depreciation, underinvestment, or coercive disruption (e.g., rare earth embargoes, chip sanctions, or capital controls) propagate into asset prices, volatility, and returns. By endogenizing institutions, this paper offers a unified theory of growth, risk, and valuation under institutional uncertainty -- one that is urgently needed in today’s multipolar and unstable global order. |
| Keywords: | Asset Pricing, Institutions, Consumption-Based Capital Asset Pricing Model, Production-Based Asset Pricing Model, Political Risk, Institutional Volatility, Endogenous Institutions, Macro-Financial Resilience |
| Date: | 2025–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:765 |
| By: | Cornelsen, Jens; Mählck, Anna |
| Abstract: | This discussion paper examines the success factors of different advertising formats on AI platforms and based on this, develops a practice-oriented guide for the successful implementation of operational advertising measures for AI tools. The relevance of the topic results from the growing importance of AI in everyday digital life as well as the challenges for existing advertising measures to "prevail" in an increasingly advertising-resistant environment. This article is based on an IU master's thesis in which comprehensive literature research was combined with expert interviews and focus groups. Methodologically, potential success factors of different forms of advertising are identified and then evaluated regarding their "target group performance" using a self-developed "AI Advertising Relevance Score" (AARS) based on an utility model. The work further develops existing research on the integration of advertising formats in AI tools while also providing valuable implementation recommendations for operational practice. The still largely limited use of advertising in AI tools shows that further empirical studies are required to validate the direct applicability of the research results presented here in different scenarios. Overall, however, the work makes a valuable contribution to the fundamental understanding of the possibilities and limits of different advertising formats in AI tools and provides practical implications for the sustainable economic stabilization or "monetization" of conversational AI systems such as ChatGPT, Google Gemini or CoPilot. |
| Keywords: | Digitalization, artificial intelligence, ChatGPT, Google Gemini, CoPilot, AI tools, advertising, communication, success factors, utility analysis |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iubhma:323242 |