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on Utility Models and Prospect Theory |
| By: | Leonardo Baggiani; Martin Herdegen; Nazem Khan |
| Abstract: | We revisit the problem of portfolio selection, where an investor maximizes utility subject to a risk constraint. Our framework is very general and accommodates a wide range of utility and risk functionals, including non-concave utilities such as S-shaped utilities from prospect theory and non-convex risk measures such as Value at Risk. Our main contribution is a novel and complete characterization of well-posedness for utility-risk portfolio selection in one period that takes the interplay between the utility and the risk objectives fully into account. We show that under mild regularity conditions the minimal necessary and sufficient condition for well-posedness is given by a very simple either-or criterion: either the utility functional or the risk functional need to satisfy the axiom of sensitivity to large losses. This allows to easily describe well-posedness or ill-posedness for many utility-risk pairs, which we illustrate by a large number of examples. In the special case of expected utility maximization without a risk constraint (but including non-concave utilities), we show that well-posedness is fully characterised by the asymptotic loss-gain ratio, a simple and interpretable quantity that describes the investor's asymptotic relative weighting of large losses versus large gains. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10351 |
| By: | Zachary Van Oosten; Ruodu Wang |
| Abstract: | We propose a new decision model under ambiguity, called the Choquet rank-dependent utility model. The model extends the Choquet expected utility model by allowing for the reduction to the rank-dependent utility model in the absence of ambiguity, rather than to the expected utility model. The model has three major components: a utility function $u$ and a probability distortion $g$, which together capture the risk component of the preferences, and generalized probabilistic beliefs $\nu$, which captures the ambiguity component of the preferences. The representation takes the form $X\succsim Y\iff \int_{\Omega} u(X)d(g\circ\nu)\iff \int_{\Omega} u(Y)d(g\circ\nu).$ To obtain the axiomatization, we work in the uncertainty setting of Savage with a non-ambiguous source. Afterwards, we discuss ambiguity attitudes and their representation with respect to the generalized probabilistic beliefs, along with conditions for a robust representation. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10788 |
| By: | Kristian Behrens; Yasusada Murata |
| Abstract: | We characterize the family of utility functions satisfying linear fractional relative risk aversion (LFRRA) in terms of the Gauss hypergeometric functions. We apply this family, which nests various utility functions used in different strands of literature, to monopolistic competition and obtain a closed-form solution for the profit-maximizing price by generalizing the Lambert W function. We let firm-level data decide whether the RRA in each sector or in the aggregate economy is increasing, decreasing, or constant, which in turn determines whether markups are decreasing, increasing, or constant with respect to marginal costs. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.09865 |
| By: | Charles F. Manski; John Mullahy |
| Abstract: | This paper considers quantile-welfare evaluation of health policy as an alternative to utilitarian evaluation. Manski (1988) originally proposed and studied maximization of quantile utility as a model of individual decision making under uncertainty, juxtaposing it with maximization of expected utility. That paper's primary motivation was to exploit the fact that maximization of quantile utility requires only an ordinal formalization of utility, not a cardinal one. This paper transfers these ideas from analysis of individual decision making to analysis of social planning. We begin by summarizing basic theoretical properties of quantile welfare in general terms rather than related specifically to health policy. We then propose a procedure to nonparametrically bound the quantile welfare of health states using data from binary-choice time-tradeoff (TTO) experiments of the type regularly performed by health economists. After this we assess related econometric considerations concerning measurement, using the EQ-5D framework to structure our discussion. |
| JEL: | I1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34247 |
| By: | Qingyin Ma; Alexis Akira Toda |
| Abstract: | The consumption function maps current wealth and the exogenous state to current consumption. We prove the existence and uniqueness of a consumption function when the agent has a preference for wealth. When the period utility functions are restricted to power functions, we prove that the consumption function is asymptotically linear as wealth tends to infinity and provide a complete characterization of the asymptotic slopes. When the risk aversion with respect to wealth is less than that for consumption, the asymptotic slope is zero regardless of other model parameters, implying wealthy households save a large fraction of their income, consistent with empirical evidence. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.12195 |
| By: | Noemí Navarro (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, UR - Université de Rennes); Róbert Veszteg (Waseda University [Tokyo, Japan]) |
| Abstract: | We experimentally test welfarism and scale invariance, two prominent simplifying assumptions that are often used to characterize bargaining solutions in theoretical models. Our study relies on a context-rich bargaining environment and varies the parameters of the bargaining problem along with the information that bargaining parties have about each other. Under the auxiliary assumption of selfishness, it aims at understanding whether bargaining is guided by abstract utilities as assumed by the classic version of cooperative bargaining theory or rather by comparisons in observables (e.g., money) as often assumed by behavioral models of decision-making. The experimental results show that welfarism and scale invariance are supported when the relevant information is only privately known. In general, bargaining outcomes are robust to rescaling that only affects the anchoring points of the utility scale (welfarism), but not to rescaling that affects the units on the utility scale (scale invariance). Overall, our experimental data deliver scarce empirical support to classic theoretical bargaining solutions based on abstract utility units. |
| Keywords: | Welfarism, Scale invariance, Individual rationality, Equal-division solution, Nash bargaining solution, Experiments, Bilateral bargaining |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05246963 |
| By: | Roland Bénabou; Luca Henkel |
| Abstract: | We review the economic literature on self-image, which conceptualizes identity as a set of beliefs about one’s core traits, values, goals, and social ties. Self-image concerns lead individuals to process information and make choices in non-standard ways that help affirm and protect certain valued identities. We first present the main cognitive mechanisms involved within a simple unifying framework. We then survey the extensive laboratory, online, and field experimental literature on the nature and behavioral implications of self-image concerns. We discuss in particular how they give rise to information and decision avoidance, motivated memory and beliefs, excuse-driven behavior, preferences for truth-telling, hypothetical bias, moral cleansing and moral licensing, collective identities, political preferences, and other forms of self-signaling or self-deception. We subsequently discuss common empirical strategies used to identify self-image concerns, as well as the threats to their validity and how to alleviate them. We conclude by outlining open questions and directions for future research on the belief-based approach to identity. |
| Keywords: | self-image, identity, motivated beliefs, belief-based utility, behavioral economics, experimental economics |
| JEL: | D01 D91 C90 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12147 |
| By: | Daiya Mita (Nomura Asset Management Co. Ltd.); Taiga Saito (Graduate School of Economics, Hitotsubashi University); Akihiko Takahashi (Faculty of Economics, The University of Tokyo) |
| Abstract: | For global multi-asset fund managers, reflecting their macroeconomic views in the prediction of expected interest rates across countries, exchange rates, and equity prices in a manner consistent with economic theory is challenging. The existing literature has yet to provide an established multi-currency model that is flexible enough to incorporate such views into the prediction of future asset price dynamics. To address this problem, this paper proposes a novel multi-currency incomplete market model in which agents in each country have logarithmic utility but differ in their time preferences and subjective beliefs, within a market equilibrium framework, namely, supply and demand equilibrium. With only a few exogenous inputs, such as each country’s output process and agents’ preference parameters, the model endogenously determines equilibrium interest rates, exchange rates, and stock prices, along with optimal consumption and portfolios. Thus, the model enables us to (i) flexibly incorporate crosscountry differences in investors’ time preferences and macroeconomic outlooks, and (ii) examine how these differences affect equilibrium interest rates and asset prices, including stock prices and exchange rates. Moreover, by applying the particle filtering method within a state-space framework based on the twocountry, two-currency version of the model to Japanese and U.S. market data (equity index futures, shortterm interest rates, and the exchange rate), the model not only fits the observed dynamics of equity indices, short rates, and the exchange rate, but also effectively estimates the dynamics of home-country biases and latent economic factors, which can be utilized in making investment decisions in asset management practice. |
| Keywords: | multi-currency equilibrium model, incomplete market, subjective beliefs, multi-asset investment, state-space model |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2025cf1257 |
| By: | Kensei Nakamura; Shohei Yanagita |
| Abstract: | Completeness and transitivity are standard rationality conditions in economics. However, under ambiguity, decision makers sometimes violate these requirements because of the difficulty of forming accurate predictions about ambiguous events. Motivated by this, we study various ambiguity preferences that partially satisfy completeness and transitivity. Our characterization results show that completeness and a novel yet natural weakening of transitivity correspond to two opposite ways of using multiple probability distributions in mind; that is, these two axioms have dual implications at the level of cognitive processes for ambiguity. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.11660 |
| By: | Hai Yang; Joseph Y. J. Chow |
| Abstract: | Urban mobility is undergoing rapid transformation with the emergence of new services. Mobility hubs (MHs) have been proposed as physical-digital convergence points, offering a range of public and private mobility options in close proximity. By supporting Mobility-as-a-Service, these hubs can serve as focal points where travel decisions intersect with operator strategies. We develop a bilevel MH platform design model that treats MHs as control levers. The upper level (platform) maximizes revenue or flow by setting subsidies to incentivize last-mile operators; the lower level captures joint traveler-operator decisions with a link-based Perturbed Utility Route Choice (PURC) assignment, yielding a strictly convex quadratic program. We reformulate the bilevel problem to a single-level program via the KKT conditions of the lower level and solve it with a gap-penalty method and an iterative warm-start scheme that exploits the computationally cheap lower-level problem. Numerical experiments on a toy network and a Long Island Rail Road (LIRR) case (244 nodes, 469 links, 78 ODs) show that the method attains sub-1% optimality gaps in minutes. In the base LIRR case, the model allows policymakers to quantify the social surplus value of a MH, or the value of enabling subsidy or regulating the microtransit operator's pricing. Comparing link-based subsidies to hub-based subsidies, the latter is computationally more expensive but offers an easier mechanism for comparison and control. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10465 |
| By: | Thomas F Epper (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]); Ivan Mitrouchev (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes) |
| Abstract: | Social preferences are widely studied in behavioral economics, with some validated survey modules to measure trust, altruism and reciprocity. Despite growing interest in inequality aversion-defined as an individual's dislike of disparities in outcomes-there is, however, no dedicated and validated module to assess this specific social preference. Moreover, inequality aversion and altruism are often hard to disentangle, which points to the need for a unified module that incorporates both preferences. To bridge these gaps, we introduce a novel survey module that captures general attitudes toward inequality aversion and altruism. This module was developed and validated through an experimental study with a representative U.S. population sample. Our results demonstrate that the proposed module effectively captures variations in both inequality aversion and altruism, with consistent reliability across individual heterogeneity. This tool offers researchers a standardized and generalizable approach for measuring inequality aversion and altruism, paving the way for future studies and across diverse contexts. |
| Abstract: | Les préférences sociales sont largement étudiées en économie comportementale, avec certains modules d'enquête validés pour mesurer la confiance, l'altruisme et la réciprocité. Malgré l'intérêt croissant pour l'aversion à l'inégalité, définie comme l'aversion d'un individu pour les disparités de résultats, il n'existe toutefois aucun module dédié et validé pour évaluer cette préférence sociale spécifique. De plus, l'aversion pour les inégalités et l'altruisme sont souvent difficiles à distinguer, ce qui souligne la nécessité d'un module unifié intégrant ces deux préférences. Pour combler ces lacunes, nous introduisons un nouveau module d'enquête qui permet de saisir les attitudes générales à l'égard de l'aversion pour les inégalités et de l'altruisme. Ce module a été développé et validé dans le cadre d'une étude expérimentale menée auprès d'un échantillon représentatif de la population américaine. Nos résultats démontrent que le module proposé capture efficacement les variations tant en matière d'aversion pour les inégalités que d'altruisme, avec une fiabilité constante malgré l'hétérogénéité des individus. Cet outil offre aux chercheurs une approche standardisée et généralisable pour mesurer l'aversion pour les inégalités et l'altruisme, ouvrant la voie à de futures études dans divers contextes. |
| Keywords: | Inequality, Altruism, Redistribution, Social preferences, Survey instrument |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05247375 |
| By: | Jonathan Teagan |
| Abstract: | This paper develops an economic model of the Open Source Intelligence (OSINT) attention economy in contemporary armed conflict. We conceptualize attention (e.g. social media views, followers, likes) as revenue, and time and risk spent in analysis as costs. Using utility functions and simple game theoretic setups, we show how OSINT actors (amateurs, journalists, analysts, and state operatives) allocate effort to maximize net attention benefit. We incorporate strategic behaviors such as a first mover advantage (racing to publish) and prisoner's dilemma scenarios (to share information or hold it back). In empirical case studies, especially the Ukraine conflict actors like the UAV unit Madyar's Birds and volunteer channels like Kavkazfighter, illustrate how battlefront reporting translates into digital revenue (attention) at real cost. We draw on recent literature and data (e.g., public follower counts, viral posts) to examine trends such as OSINT virality. Finally, we discuss policy implications for balancing transparency with operational security, citing calls for verification ethics and attention sustaining narratives. Our analysis bridges conflict studies and economics, highlighting OSINT as both a public good and a competitive product in today's information war. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10548 |
| By: | Ren\'e A\"id; Philippe Bergault; Mathieu Rosenbaum |
| Abstract: | Recent regulation on intraday electricity markets has led to the development of shared order books with the intention to foster competition and increase market liquidity. In this paper, we address the question of the efficiency of such regulations by analysing the situation of two exchanges sharing a single limit order book, i.e. a quote by a market maker can be hit by a trade arriving on the other exchange. We develop a Principal-Agent model where each exchange acts as the Principal of her own market maker acting as her Agent. Exchanges and market makers have all CARA utility functions with potentially different risk-aversion parameters. In terms of mathematical result, we show existence and uniqueness of the resulting Nash equilibrium between exchanges, give the optimal incentive contracts and provide numerical solution to the PDE satisfied by the certainty equivalent of the exchanges. From an economic standpoint, our model demonstrates that incentive provision constitutes a public good. More precisely, it highlights the presence of a competitiveness spillover effect: when one exchange optimally incentivizes its market maker, the competing exchange also reaps indirect benefits. This interdependence gives rise to a free-rider problem. Given that providing incentives entails a cost, the strategic interaction between exchanges may lead to an equilibrium in which neither platform offers incentives -- ultimately resulting in diminished overall competition. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10094 |
| By: | Archankul, Arnon (Center for Mathematical Economics, Bielefeld University); Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Hellmann, Tobias (Center for Mathematical Economics, Bielefeld University); Thijssen, Jacco J.J. (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | We consider a singular control model of cash reserve management, driven by a diffusion under ambiguity. The manager is assumed to have maxmin preferences over a set of priors characterized by $\kappa$-ignorance. A verification theorem is established to determine the firm’s cost function and the optimal cash policy; the latter taking the form of a control barrier policy. In a model driven by arithmetic Brownian motion, we use Dynkin games to show that an increase in ambiguity leads to higher expected costs under the worst-case prior and a narrower inaction region. The latter effect can be used to provide an ambiguity-driven explanation for observed cash management behavior. Our findings can be applied to broader applications of singular control in managing inventories under ambiguity. |
| Keywords: | Singular control, Ambiguity, Inventory models |
| Date: | 2025–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:bie:wpaper:731 |
| By: | Subhasish Dugar (Department of Economics, University of Utah); Kenju Kamei (Faculty of Economics, Keio University) |
| Abstract: | Performance pay raises productivity but can also trigger costly peer dynamics, which can influence workers’ preferences over pay schemes. We test whether sabotage risk drives compensation choices using a field experiment with Indian vegetable packers. Workers first perform under exogenously assigned tournaments that differ only in pay inequality but are equivalent in total payout, then choose between them, enabling endogenous sorting. Under impartial expert evaluation, workers select steeper tournaments, indicating no aversion to inequality or competition. Under peer evaluation, sabotage escalates sharply with pay dispersion, prompting workers to preemptively prefer more equitable schemes. Our study expands the literature on labor market sorting by identifying sabotage risk as a fundamental driver of sorting and shows how destructive peer dynamics can rationalize compressed wage structures in practice. |
| Keywords: | Field experiment, Pay equity, Tournament, Sabotage, Sorting. |
| JEL: | C93 J31 M52 D81 |
| Date: | 2025–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-020 |
| By: | Kuok Sin Un; Marcel Ausloos |
| Abstract: | Through a novel approach, this paper shows that substantial change in stock market behavior has a statistically and economically significant impact on equity risk premium predictability both on in-sample and out-of-sample cases. In line with Auer's ''Bullish ratio'', a ''Bullish index'' is introduced to measure the changes in stock market behavior, which we describe through a ''fluctuation detrending moving average analysis'' (FDMAA) for returns. We consider 28 indicators. We find that a ''positive shock'' of the Bullish Index is closely related to strong equity risk premium predictability for forecasts based on macroeconomic variables for up to six months. In contrast, a ''negative shock'' is associated with strong equity risk premium predictability with adequate forecasts for up to nine months when based on technical indicators. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10483 |
| By: | Srijesh Pillai; Rajesh Kumar Chandrawat |
| Abstract: | For premium consumer products, pricing strategy is not about a single number, but about understanding the perceived monetary value of the features that justify a higher cost. This paper proposes a robust methodology to deconstruct a product's price into the tangible value of its constituent parts. We employ Bayesian Hierarchical Conjoint Analysis, a sophisticated statistical technique, to solve this high-stakes business problem using the Apple iPhone as a universally recognizable case study. We first simulate a realistic choice based conjoint survey where consumers choose between different hypothetical iPhone configurations. We then develop a Bayesian Hierarchical Logit Model to infer consumer preferences from this choice data. The core innovation of our model is its ability to directly estimate the Willingness-to-Pay (WTP) in dollars for specific feature upgrades, such as a "Pro" camera system or increased storage. Our results demonstrate that the model successfully recovers the true, underlying feature valuations from noisy data, providing not just a point estimate but a full posterior probability distribution for the dollar value of each feature. This work provides a powerful, practical framework for data-driven product design and pricing strategy, enabling businesses to make more intelligent decisions about which features to build and how to price them. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.11089 |