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on Utility Models and Prospect Theory |
| By: | Elizabeth Dadzie; Wilfried Kuissi-Kamdem; Marcel Ndengo |
| Abstract: | This paper investigates a robust optimal consumption, investment, and reinsurance problem for an insurer with Epstein-Zin recursive preferences operating under model uncertainty. The insurer's surplus follows the diffusion approximation of the Cram\'er-Lundberg model, and the insurer can purchase proportional reinsurance. Model ambiguity is characterised by a class of equivalent probability measures, and the insurer, being ambiguity-averse, aims to maximise utility under the worst-case scenario. By solving the associated coupled forward-backward stochastic differential equation (FBSDE), we derive closed-form solutions for the optimal strategies and the value function. Our analysis reveals how ambiguity aversion, risk aversion, and the elasticity of intertemporal substitution (EIS) influence the optimal policies. Numerical experiments illustrate the effects of key parameters, showing that optimal consumption decreases with higher risk aversion and EIS, while investment and reinsurance strategies are co-dependent on both financial and insurance market parameters, even without correlation. This study provides a comprehensive framework for insurers to manage capital allocation and risk transfer under deep uncertainty. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.03031 |
| By: | Kaushil Patel |
| Abstract: | To choose between two discrete goods, a consumer pays attention to only those with prices below a threshold. From these, she chooses her most preferred good. We assume consumers in a population have the same preference but may have different thresholds. Similar models of bounded rationality have been studied in the empirical marketing literature. We fully characterize the model, and using observational choice data alone, we identify the welfare implications of a price change. The behavioral content of our model overlaps with an important class of random utility models, but the welfare implications are meaningfully different. The distribution of equivalent variation under our model first-order stochastically dominates that under the random utility model. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.03813 |
| By: | Spada, Riccardo; Moritz, Laura; Rommel, Jens; Cerroni, Simone; Meuwissen, Miranda P.M.; Dalhaus, Tobias |
| Abstract: | Price volatility is a significant risk in agriculture, and risk-averse farmers might sacrifice part of their expected profits to mitigate it. Risk management tools such as forward contracts, futures, options, and price insurance, are designed to hedge price risk. Yet adoption rates are low, which contradicts standard expected utility maximizing behavior. We therefore systematically review the literature on the relationship between behavioral factors and farmers’ adoption of price risk management tools to better understand the adoption decision. We here categorize behavioral factors into behavioral preferences, formally integrated into economic choice models, and into psychological factors, which lack mathematical formalization. We use these conceptual model to define search terms and then follow the PRISMA approach to identify 100 relevant papers. Results show that the vast majority of studies incorporate risk aversion in an Expected Utility framework to conceptualize price risk management decisions. Therefore, we conclude that behavioral economic models such as Cumulative Prospect Theory, that incorporates behavioral preferences such as loss aversion and probability distortion, offer promising pathways to better explain farmers’ price risk management decisions. Regarding psychological factors, findings highlight the role of risk attitudes, social environment, and cognitive perceptions in shaping farmers’ decisions. Further research is required to identify behavioral economic preferences that explain price risk management decisions. Moreover, price risk management tools should be adjusted to better consider farmer preferences and thereby become more attractive to farmers. |
| Keywords: | Agricultural Finance, Demand and Price Analysis |
| URL: | https://d.repec.org/n?u=RePEc:ags:aes025:356632 |
| By: | Guibril Zerbo; Olivier Renault |
| Abstract: | We propose a model, called β-RDEu (Rank Dependent Expected Utility), that explains how distrust in an exchange relationship can lead to zero demand for a good or service, even when it is heavily subsidized. If an agent’s preferences, as estimated in a decontextualized environment (i.e., without distrust), are represented by a function V, then the β-RDEu function for a contract l is defined as βu(w_n) + (1 − β)V (l), and represents the agent’s preferences in a market environment where distrust may arise. The parameter β captures the agent’s level of distrust, and the wealth level wn represents an outcome excluded by the contractual relationship but considered plausible by a distrustful agent. We characterize the β-RDEu utility through a set of assumptions about preferences, and then apply the model to agricultural insurance demand. The main prediction is that agricultural insurance demand can be zero at any price if the agent is sufficiently distrustful, even though the contract provides positive net utility when assessed solely through the function V. We discuss the introduction of behavioral interventions aimed at either leveraging or reducing distrust to increase the adoption rate of agricultural insurance products. In particular, we propose a procedure to estimate the distribution of the β parameter within a population, in order to show how knowledge of this distribution can enhance the effectiveness of a subsidy. |
| Keywords: | Willingness to pay; Behavioral insurance; Distrust; Risk aversion; Zero probability distortions; Public policies |
| JEL: | D81 D78 D91 G22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-44 |
| By: | Youngsoo Jang (Yonsei University); Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies) |
| Abstract: | Should public policies address inequality due to heterogeneous life expectancy? Intuitively, taking short life as a disadvantage, such policies should favor those with high mortality. Yet, pension systems implicitly redistribute from low-life-expectancy to high-life-expectancy people. Moreover, this direction of redistribution is optimal from the perspective of the standard utilitarian welfare criterion. We study mortality-related redistribution in a more flexible setting. We start by establishing a formal framework for the analysis by clearly distinguishing between the redistribution along mortality and income dimensions, and thus between mortality and income progressivity. We then show that it is optimal to redistribute towards high-mortality people in two cases. First, when welfare criterion features aversion to lifetime inequality which exceeds aversion to consumption inequality. Second, when income and mortality are negatively correlated, and income redistribution tools are limited. |
| Keywords: | Mortality-related redistribution, Welfare criteria, Pensions, Prioritarianism |
| JEL: | D30 D60 D63 H55 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-268 |
| By: | Isaak Mengesha; Meiqi Sun; Debraj Roy |
| Abstract: | Why do maladaptive perceptions and norms, such as zero-sum interpretations of interaction, persist even when they undermine cooperation and investment? We develop a framework where bounded rationality and heterogeneous cognitive biases shape the evolutionary dynamics of norm coordination. Extending evolutionary game theory with quantal response equilibria and prospect-theoretic utility, we show that subjective evaluation of payoffs systematically alters population-level equilibrium selection, generating stable but inefficient attractors. Counterintuitively, our analysis demonstrates that the benefit of rationality and the cost of risk aversion on welfare behave in nonmonotone ways: intermediate precision enhances coordination, while excessive precision or strong loss aversion leads to persistent lock-in at low-payoff and zero-sum equilibria. These dynamics produce an endogenous equity-efficiency trade-off: parameter configurations that raise aggregate welfare also increase inequality, while more equal distributions are associated with lower efficiency. The results highlight how distorted payoff perceptions can anchor societies in divergent institutional trajectories, offering a behavioral-evolutionary explanation for persistent zero-sum norms and inequality. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.16453 |
| By: | Campanale Claudio (Department of Economics, Social Studies, Applied Mathematics and Statistics, and Collegio Carlo Alberto, University of Turin; CeRP) |
| Abstract: | In the present research I examine the implications of heterogeneous beliefs about the expected equity premium in a life-cycle portfolio choice model with background income risk. While subjective and dispersed expectations have become a popular mechanism to explain asset pricing phenomena, introducing belief heterogeneity in a standard framework generates an additional puzzle: the sensitivity of risky asset holdings to expected returns is far greater than observed in the data. Incorporating a direct utility component over the safe asset mitigates this excess sensitivity, producing asset allocation responses that are consistent with empirical evidence. The extended model also replicates realistic patterns of stock market participation and conditional risky shares across wealth and age profiles. |
| Keywords: | Portfolio choice, Preference for Safety, Life-cycle, Heterogeneous Beliefs |
| JEL: | E21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:tur:wpapnw:100 |
| By: | Chengqi Zang; Gabriel P. Andrade; O\u{g}uzhan Ersoy |
| Abstract: | We study decentralized markets for goods whose utility perishes in time, with compute as a primary motivation. Recent advances in reproducible and verifiable execution allow jobs to pause, verify, and resume across heterogeneous hardware, which allow us to treat compute as time indexed capacity rather than bespoke bundles. We design an automated market maker (AMM) that posts an hourly price as a concave function of load--the ratio of current demand to a "floor supply" (providers willing to work at a preset floor). This mechanism decouples price discovery from allocation and yields transparent, low latency trading. We establish existence and uniqueness of equilibrium quotes and give conditions under which the equilibrium is admissible (i.e. active supply weakly exceeds demand). To align incentives, we pair a premium sharing pool (base cost plus a pro rata share of contemporaneous surplus) with a Cheapest Feasible Matching (CFM) rule; under mild assumptions, providers optimally stake early and fully while truthfully report costs. Despite being simple and computationally efficient, we show that CFM attains bounded worst case regret relative to an optimal benchmark. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.16357 |
| By: | Hasib Uddin Molla; Ankit Banarjee; Matthew Backhouse; Jinniao Qiu |
| Abstract: | In this work, we extend deep learning-based numerical methods to fully coupled forward-backward stochastic differential equations (FBSDEs) within a non-Markovian framework. Error estimates and convergence are provided. In contrast to the existing literature, our approach not only analyzes the non-Markovian framework but also addresses fully coupled settings, in which both the drift and diffusion coefficients of the forward process may be random and depend on the backward components $Y$ and $Z$. Furthermore, we illustrate the practical applicability of our framework by addressing utility maximization problems under rough volatility, which are solved numerically with the proposed deep learning-based methods. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.08735 |
| By: | Kitamura, Kazuhito |
| Abstract: | Persistent macroeconomic imbalances, long‑run deflation, and entrenched inequality are often interpreted as outcomes of market incompleteness or failures. This paper offers an alternative perspective by developing a dynamic equilibrium framework for open economies that incorporates asset‑side mechanisms. Within this framework, and by re‑examining the transversality condition (TVC) as an asset‑valuation criterion, such persistent imbalances can emerge as structural outcomes of optimal behavior rather than anomalies. The model yields the relationship:Rt-ρ=n+Da-U(θa)/Uc; This relationship shows that the gap between the asset return (Rt) and time preference (ρ) is sustained by the combined effects of capital diffusion (Da), population growth (n) and preference terms (U(θa)/Uc). This reinterpretation explains how steady states with persistent differences in asset levels and external balances can coexist, and frames equilibrium as a dynamic configuration shaped by interdependence across economies and agents, beyond the traditional price‑clearing mechanism. The results align theory with observed realities and offer tools for policy design, including structural selection of the steady state, policy control of capital flows, and asset‑dynamics‑based policy reconstruction. Furthermore, by formalizing a concept akin to “economic entropy, ” this framework provides a pathway beyond quantitative equilibrium theory toward a richer understanding of qualitative development. |
| Keywords: | Dynamic equilibrium; Heterogeneous preferences; Capital diffusion; Asset-based utility; Steady-state divergence; Transversality condition; |
| JEL: | A1 C0 C5 D5 |
| Date: | 2025–10–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126667 |
| By: | Estelle Campenet; David Desmarchelier; Markus Herrmann |
| Abstract: | This paper develops a simple general equilibrium model with social capital accumulation. The representative household chooses how much time to allocate between work and social capital accumulation. Social capital generates satisfaction, but this satisfaction is affected by pollution. This paper considers two cases: (1) pollution reduces the marginal utility of social capital (social withdrawal effect) and (2) pollution increases the marginal utility of social capital (social engagement effect). Pollution, treated as a pure externality, is assumed to originate from production. In line with Pigouvian principles, the government introduces a proportional tax on production to finance depollution expenditures under a balanced budget rule. When preferences exhibit a social engagement effect or a weak social withdrawal effect, the economy has a unique steady state, which may experience a Laffer Curve. When preferences exhibit a strong social withdrawal effect, two steady states can coexist: one characterized by a high level of social capital and low consumption (voluntary simplicity steady state), and the other by a low level of social capital and high consumption (consumerist steady state). As in the case of a unique steady state, a Laffer Curve may emerge at the consumerist steady state but never at the voluntary simplicity steady state. However, the voluntary simplicity steady state always exhibits a Green Paradox, a phenomenon that never occurs at the consumerist steady state. Regarding the dynamics, the unique steady state that arises when preferences exhibit a social engagement effect or a weak social withdrawal effect is saddle-path stable. When preferences are described by a strong withdrawal effect, we prove that the consumerist steady state is also always saddle-path stable while the voluntary simplicity steady state is always locally indeterminate. |
| Keywords: | Green Paradox, Laffer Curve, local indeterminacy and social capital. |
| JEL: | C62 H23 O44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-44 |
| By: | Thomas G. Poder; Hosein Ameri |
| Abstract: | In this report, we empirically compare seven elicitation techniques for evaluating the utilities associated with health states described by the Short-Form 6-Dimension version 2 (SF-6Dv2), where the standard gamble (SG) is considered the reference approach. This allows us to estimate a SF-6Dv2 value set of health utilities for use in Quebec and to introduce a new approach based on multiple bounded discrete choice (MBDC). Various econometric estimation techniques were used, and all analyses were performed on data collected from French-speaking individuals aged 18 and over residing in Quebec, Canada, in 2016 and 2018. The discrete choice experiment (DCE) approach combined with best-worst scaling (DCEBWS) appears to be a coherent and comparable alternative to the SG. Our analyses also show that the MBDC approach is feasible and allows for the generation of utility data representative of respondents' preferences. The reference SF-6Dv2 value set selected for Quebec is derived from DCEBWS and ranges from -0.683 for the worst health condition (555655) to 1 for perfect health (111111). The pain dimension shows the largest decreases in coefficients in terms of magnitude, indicating its significant influence in establishing the utility values for health conditions in Quebec. Dans ce rapport, nous comparons empiriquement sept techniques d’élicitation pour évaluer les utilités associées aux états de santé décrits par le Short-Form 6-Dimension version 2 (SF-6Dv2) et où le pari ordinaire (standard gamble – SG) est considérée comme l’approche de référence. Ce faisant, cela nous permet d’estimer un ensemble de valeurs d’utilité pour le SF-6Dv2 à utiliser au Québec et d’introduire une nouvelle approche basée sur le choix dichotomique multiple borné (multiple bounded discrete choice, MBDC). Diverses techniques d’estimation économétrique ont été utilisés et toutes les analyses ont été réalisées à partir de données recueillies auprès de personnes francophones âgées de 18 ans et plus résidant au Québec, Canada, en 2016 et 2018. L’approche du choix expérimental discret (discrete choice experiment – DCE) combinée avec un best-worst scaling (DCEBWS) apparaît comme étant une alternative cohérente et comparable au SG. Il ressort également de nos analyses que l’’approche MBDC est réalisable et permet de générer des données d’utilité représentatives des préférences des répondants. L’ensemble de référence de valeurs d’utilité du SF-6Dv2 retenu pour le Québec est issu du DCEBWS et varie de -0, 683 pour le pire état de santé (555655) à 1 pour une santé parfaite (111111). La dimension de la douleur présente ici les plus fortes diminutions de coefficients en termes d’ampleur, ce qui indique sa grande influence dans l’établissement des valeurs d’utilité des états de santé. |
| Keywords: | Quality-adjusted life year, standard gamble, discrete choice experiment, multiple bounded discrete choice, health utility, Année de vie ajustée par la qualité, pari ordinaire, choix expérimental discret, choix dichotomique multiple borné, utilité en santé |
| Date: | 2025–11–11 |
| URL: | https://d.repec.org/n?u=RePEc:cir:cirpro:2025rp-26 |
| By: | Qingyin Ma; Xinxi Song; Alexis Akira Toda |
| Abstract: | Empirical evidence shows that wealthy households have substantially higher saving rates and markedly lower marginal propensity to consume (MPC) than other groups. Existing theory can account for this pattern only under restrictive assumptions on returns, discounting, and preferences. This paper develops a general theory of optimal savings with preference shocks, allowing risk aversion to vary across states and over time. We show that incorporating such heterogeneity in risk attitudes fundamentally alters the asymptotic dynamics of consumption and saving. In particular, we provide an analytical characterization of the asymptotic MPCs and show that zero asymptotic MPCs, corresponding to a 100\% asymptotic saving rate, arise under markedly weaker conditions than in existing theory. Strikingly, such outcomes occur whenever there is a positive probability that agents become less risk averse in the future. As a result, the vanishing MPC emerges as a generic feature rather than a knife-edge result of the optimal savings model, offering a more theoretically robust and empirically consistent account of the saving behavior of wealthy households. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.03142 |
| By: | Ding, Yihong; Robinson, Elizabeth; Balcombe, Kelvin |
| Abstract: | This paper extends the existing individual decision-making framework of adapting to climate change by considering the effects of prior personal experience in shaping risk preferences. Conducting Prospect Theory-based “lab-in-field” risk experiments in rural areas of Xinjiang Province, we elicit Chinese farmers' risk curvature and probability bias by adopting more flexible Prelec's two-parameter probability functions. Using Bayesian approaches to estimation, we find that farmers' prior experiences not only provide information that influences the subjective distributions of future outcomes but also, by shaping farmers' personal risk preferences, affects how farmers absorb and update this information. As such, our research suggests that individual risk preferences can evolve, and the effects of personal experience on preferences exhibit distinct patterns depending on whether farmers face benefits or losses. Experiencing production damages tends to make farmers more averse to losses and increases their optimistic bias concerning personal loss risks. A policy implication of these findings is that it is crucial to reduce farmers' cognitive biases regarding their own climate-related losses and their over-reliance on personal experiences in order to make accurate risk management decisions. |
| Keywords: | decision-making framework; climate change; experience; Bayesian approach; risk preference |
| JEL: | C1 |
| Date: | 2025–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130030 |
| By: | Ventura, Luigi; Horioka, Charles Yuji |
| Abstract: | In this paper, we first show that a particular form of precautionary saving, which we will call "intertemporal precautionary saving" to distinguish it from purely intertemporal and purely precautionary saving, will inevitably arise in the case of pure (downside) risk as long as consumers are risk-averse, even if they are not prudent. We then present a simple example that shows that even pure precautionary saving (i.e., saving generated by risk alone without effects on expected income) may arise as long as consumers are risk-averse, even if they are not prudent and even if risk is speculative (two-sided). |
| Keywords: | household saving, precautionary saving, prudence, pure risk, risk aversion, saving, speculative risk |
| JEL: | D11 D14 D15 D81 E21 G51 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000255 |
| By: | Alyssa Shawntay Williams (Rhodes University) |
| Abstract: | In digital economies, electronic word-of-mouth (e-WOM) has emerged as a critical mechanism for reducing information asymmetry in online marketplaces, functioning as an informal yet potent form of market signalling. As consumers increasingly rely on peer-generated content (such as reviews, testimonials, and social media commentary) to guide purchase decisions, e-WOM serves as a public good influencing market behaviour, perceived utility, and post-purchase satisfaction. Despite its growing economic relevance, there remains limited empirical understanding of how distinct e-WOM characteristics shape consumer utility and satisfaction - key drivers of demand stability and long-term market efficiency.This study investigates the economic impact of seven e-WOM dimensions (namely, argument quality, source credibility, message usefulness, trust in the message, valence, volume, and existing e-WOM) on post-purchase satisfaction among South African millennial consumers in the e-commerce sector. Employing a quantitative design with 405 respondents, data were analysed using Confirmatory Factor Analysis (CFA) and Structural Equation Modelling (SEM) following rigorous validity and reliability testing.The results reveal that three dimensions function as significant market signals: argument quality demonstrates the strongest predictive power (? = 0.112, p |
| Keywords: | Electronic word-of-mouth (e-WOM), Post-purchase behaviour, Customer relationship marketing, Generation Y (Gen Y), Millennials |
| JEL: | M31 L81 D12 |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:15316875 |
| By: | Massfeller, Anna; Hermann, Daniel; Leyens, Alexa; Storm, Hugo |
| Abstract: | Novel artificial intelligence (AI)-based decision support tools (DSTs) promise to make pesticide application more efficient. However, the adoption of existing, non-AI, DST by farmers is low, and farmers seem to prefer recommendations from human advisors. Additionally, for medical applications, there is evidence of users’ reluctance against (potentially superior) AI-based recommendations - a phenomenon known as Algorithm Aversion. This study is the first to investigate Algorithm Aversion in the farming context specifically with respect to farmers' intention to use an AI-DST for wheat fungicide application. We conducted a preregistered online survey with a representative sample of German farmers in autumn 2024. The analysis is based on a novel Bayesian probabilistic programming workflow for experimental studies. The approach allows jointly analysing an extended version of the Unified Theory of Acceptance and Use of Technology (UTAUT) with a willingness-to-pay-experiment. We find that Algorithm Aversion plays an important role in farmers’ decision-making. Our results emphasize the importance of user-friendly tech design, inform extension services on resource allocation, and stress the need for policy to support AI-DST adoption. This is the first study quantifying Algorithm Aversion in farmers’ decision-making. It forms the foundation for future research on the underlying causes of Algorithm Aversion. Additionally, we show how probabilistic programming can improve experimental research. |
| Keywords: | Agricultural and Food Policy, Research and Development/Tech Change/Emerging Technologies, Research Methods/Statistical Methods |
| URL: | https://d.repec.org/n?u=RePEc:ags:aes025:356629 |
| By: | Carmen Sainz Villalba |
| Abstract: | This paper analyzes whether there is a higher willingness-to-pay when faced with uncertain gains or uncertain losses. In addition, we look at how the restriction on choice, established with different framings, impacts the WTP. We observe that there is no difference in the WTP between gains and losses, but there is a difference in the WTP between different framings of the restriction of choice. Specifically, we see that respondents who are faced with a delegation decision have a smaller WTP than those who only face a decision of choosing between a pair of lotteries. In addition, we find that the WTP is even smaller when the default of a third-party agent choosing is imposed. |
| Keywords: | Agency, Delegation, Decision rights, Gains, Losses |
| JEL: | D81 D91 |
| URL: | https://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2024-12 |