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on Utility Models and Prospect Theory |
| By: | Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis; Konstantinos Georgalos |
| Abstract: | Ellsberg-type choices challenge the Bayesian theory of Subjective Expected Utility Maximization (SEUM) and reveal a key behavioural trait: Ambiguity Aversion (AA). Two main interpretations of AA exist. One treats AA as rational; the other sees it as a psychological bias. This paper adopts the latter view and focuses on the leading psychological account of AA, Fox and Tversky's (1995) Comparative Ignorance Hypothesis (CIH). CIH argues that AA arises as a "comparative effect" when a decision maker (DM) feels epistemically inferior for some events relative to others. In such cases, the DM becomes averse to betting on the epistemically weaker events. The paper has three goals. First, it surveys the literature on CIH. Second, it introduces a new "Bayesian Training" (BT) procedure grounded in counter factual thinking. A DM who engages in BT may escape comparative ignorance, reduce AA, and align more closely with Bayesian behaviour. Finally, we present the results of an economic experiment where we aim to test the impact of Bayesian training on behaviour. |
| Keywords: | counterfactual priors, ambiguity, Ellsberg paradox |
| JEL: | C44 D81 D83 D89 |
| Date: | 2025–12–14 |
| URL: | https://d.repec.org/n?u=RePEc:aue:wpaper:2572 |
| By: | Thomas Demuynck; Clément Staner |
| Abstract: | We develop a revealed preference test for the Choquet expected utility model with ambiguity aversion, which does not rely on specific functional form assumptions on the utility index. It is computationally efficient if the number of states is not too large, even for a large number of observations. This is a nice feature compared to other existing revealed preference tests for decision models with ambiguity. We illustrate the usefulness of our results by implementing our test on two experimental datasets from the literature, and we compare the empirical fit of this model to the subjective expected utility model. (JEL C91, D81, D91, G41) |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/390822 |
| By: | Laurens Cherchye; Thomas Demuynck; Bram De Rock; Joshua Lanier |
| Abstract: | Abstract We present a statistical test for the hypothesis of (approximate) utility maximization on the basis of nonparametric revealed preference conditions. We take as null hypothesis that the consumer behaves randomly, and we reject this hypothesis only if the data provides sufficient evidence to support the alternative hypothesis of approximate utility maximization. Our statistical test uses a permutation method to operationalize the principle of random consumption behavior. We show that our test (i) is valid for any sample size under the null and (ii) has an asymptotic power of one. We also provide simulated power results and two empirical applications. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/398375 |
| By: | James C. Cox (Georgia State University); Cary Deck (University of Alabama and Chapman University, Economic Science Institute); Laura Razzolini (University of Alabama); Vjollca Sadiraj (Georgia State University) |
| Abstract: | Deviations from choices predicted by self-regarding preferences have regularly been observed in standard dictator games. Such behavior is not inconsistent with conventional preference theory or revealed preference theory, which accommodate other-regarding preferences. By contrast, experiments in which giving nothing is not the least generous feasible act produce data that is inconsistent with conventional preference theory including social preference models and suggest the possible relevance of reference point models. Two such models are the reference-dependent theory of riskless choice with loss aversion and choice monotonicity in moral reference points. Our experiment includes novel treatments designed to challenge both theoretical models of reference dependence and conventional rational choice theory by poking holes in or adding to the dictator’s feasible set along with changes to the initial endowment of the players. Our design creates tests that at most one of these models can pass. However, we do not find that any of these models fully capture behavior. In part this result is due to our observing behavior in some treatments that differs from previous experiments for reasons attributable to implementation differences across studies. |
| Keywords: | Rational Choice Theory, Reference Dependence, Behavioral Models, Laboratory Experiments |
| JEL: | C7 C9 D9 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:chu:wpaper:25-13 |
| By: | Ross Chu |
| Abstract: | This paper examines how loss aversion affects wages offered by employers and accepted by job seekers. I introduce a behavioral search model with monopsonistic firms making wage offers to job seekers who experience steeper disutility from pay cuts than utility from equivalent pay raises. Employers strategically reduce pay cuts to avoid offer rejections, and they exactly match offers to current salaries due to corner solutions. Loss aversion makes three predictions on the distribution of salary growth for job switchers, which I empirically test and confirm with administrative data in Korea. First, excess mass at zero wage growth is 8.5 times larger than what is expected without loss aversion. Second, the density immediately above zero is 8.8% larger than the density immediately below it. Third, the slope of the density below zero is 6.5 times steeper than the slope above it. When estimating model parameters with minimum distance on salary growth bins, incorporating loss aversion substantially improves model fit, and the marginal value of additional pay is 12% higher for pay cuts than pay raises in the primary specification. For a hypothetical hiring subsidy that raises the value of labor to employers by half of a standard deviation, incorporating loss aversion lowers its pass-through to wages by 18% (relative to a standard model) due to higher elasticity for pay cuts and salary matches that constrain subsidized wage offers. Somewhat surprisingly, salary history bans do not mitigate these effects as long as employers can imperfectly observe current salaries with noise. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.22818 |
| By: | Julien Monardo |
| Abstract: | Discrete choice demand models are commonly used to answer various economic questions. This paper develops a representation theorem that establishes the necessary and sufficient functional form and shape restrictions characterizing a large family of discrete choice demand models extending beyond the traditional additive random utility framework. The representation theorem yields three significant empirical implications. First, it provides economic intuition for (parameter) restrictions commonly imposed on some popular discrete choice models. Second, it offers a specification toolfor building demand models that satisfy mild and easily verifiable properties while being consistent with utility maximization and accommodating rich substitution patterns, including complementarity in demand. Third, it provides an efficient numerical algorithm for demand inversion, a crucial step in the demand estimation procedure. |
| Date: | 2025–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/813 |
| By: | Palak Suri; Maureen L. Cropper |
| Abstract: | We measure benefits to households from Mumbai’s new Metro rail system. We estimate a commute mode choice model to value commute time savings in the short run and a housing choice model to value the improved commuting utility that households experience due to spatial sorting. Aggregate benefits from Metro rail are over 10 times higher when spatial sorting occurs. In the short run women, college-educated workers, and workers with above median incomes experience higher benefits than their opposites. In the long run, households with lower incomes and assets and less than college education benefit more than their wealthier counterparts. |
| JEL: | O18 R1 R2 R4 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34613 |
| By: | Cary Deck (University of Alabama and Economic Science Institute, Chapman University); Aidan Hathaway (University of Alabama); Emma Kate Henry (University of Alabama); Tigran Melkonyan (University of Alabama); Samuel Redinger (University of Alabama) |
| Abstract: | This paper examines behavior in contests where the prize value is ambiguous. We develop a theoretical model of bidding in a Tullock contest with an ambiguous prize where contestants account for the ambiguity attitude of their rival. Ambiguity affects optimal behavior via two countervailing channels - a direct effect arising from contestants’ ambiguity about the value of the prize and an indirect effect corresponding to the effect of ambiguity on the opponent’s behavior. Using a controlled laboratory experiment, we elicit individual risk and ambiguity attitudes and compare predicted and observed behavior in contests with an ambiguous prize, a risky prize and certain prizes. A comparison between contests with ambiguous and risky prizes, shows that participants invest significantly less under ambiguity. Additionally, we decompose the effect of changing from a certain prize to an ambiguous prize into two components - the first is the effect of introducing risk and the second is the effect of introducing ambiguity. Empirically, we find that both effects are significant, but work in opposite directions. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:chu:wpaper:25-16 |
| By: | Michał Łesyk (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski) |
| Abstract: | We examine the demand for retail treasury bonds and time deposits in Poland, a typical small open economy with an independent monetary policy. To this end we first employ instrumental variable, OLS and two GMM regressions based on asset demand functions derived from the microfounded household utility maximization model. We find that bonds and deposits are imperfect substitutes with the elasticity of substitution somewhat higher than the US counterpart. Next, we construct an asset aggregate consisting of bonds and deposits and find that it depends negatively on interest rate in Poland consistent with theoretical predictions with the price elasticity being close to the one estimated for the United States. Our findings suggest an effective monetary policy transmission to household assets as well as a need for active bond issuance policy of the government in countries like Poland. |
| Keywords: | demand for deposits and government bonds, substitutability between bonds and deposits |
| JEL: | E43 G11 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:378 |
| By: | Taisuke Imai; Salvatore Nunnari; Jilong Wu; Ferdinand M. Vieider |
| Abstract: | We present a meta-analysis of prospect theory (PT ) parameters, summarizing data from 166 papers reporting 812 estimates. These parameters capture risk-taking propensities, thus holding interest beyond PT. We develop an inverse-variance weighted method that accounts for correlations in PT parameters and imputes missing information on standard errors. The mean patterns align with the stylized facts of diminishing sensitivity towards outcomes and probabilities discussed in PT. Beyond this, the analysis yields several new insights: 1) between-study variation in parameters is vast; 2) heterogeneity is difficult to explain with observable study characteristics; and 3) the strongest predictors are experimental and measurement indicators, revealing systematic violations of procedure invariance. These findings highlight the promise of cognitive accounts of behavior in organizing unexplained variation in risk-taking, which we discuss. |
| Keywords: | prospect theory, probability weighting function, meta-analysis |
| JEL: | C11 D81 D91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12334 |
| By: | Nicol\'as Blampied; Alessia Cafferata; Marwil J. Davila-Fernandez |
| Abstract: | Can constantly comparing ourselves to others lead to overconsumption, ultimately increasing the ecological footprint? How do social comparisons shape green preferences over time? To answer these questions, we develop an environmental Overlapping Generations (OLG) model that explicitly accounts for Veblen effects and allows green preferences to be updated asynchronously, influenced by past environmental conditions and relative status considerations. We show that, along the optimal path, positional spending leads to overconsumption, which is detrimental to the environment. Taxing consumption is counterproductive as it does not directly address the social comparisons issue, leaving the problem unchanged. When the Veblenian mechanism is weak, the introduction of a materialistic ``secular trend'' -- that lowers the importance placed on the public good -- gives rise to two stable equilibria separated by a saddle: one in which agents care about environmental quality as much as consuming, and the other in which they derive utility solely from the latter. Studying the basins of attraction reveals that green investments are highly fragile. Our numerical experiments further indicated that, when Veblen effects are strong, the model depicts endogenous, persistent, aperiodic oscillations. In this case, green preferences fluctuate close to zero, and environmental quality is very low. Taken together, these findings suggest environmental vulnerability grows in parallel with status-driven consumption. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.16806 |
| By: | Wojciech Zawadzki (University of Warsaw, Faculty of Economic Sciences); Mikołaj Czajkowski (University of Warsaw, Faculty of Economic Sciences); Katarzyna Skrzypek (University of Warsaw, Faculty of Economic Sciences); Matylda Jędrzejewska (University of Warsaw, Faculty of Economic Sciences); Maja Żmijewska (University of Warsaw, Faculty of Economic Sciences); Jakub Ryłow (University of Warsaw, Faculty of Economic Sciences); Dominika Gadowska dos-Santos (University of Warsaw, Faculty of Economic Sciences); Gabriela Grotkowska (University of Warsaw, Faculty of Economic Sciences); Agnieszka Różycka (University of Warsaw, Faculty of Economic Sciences); Arkadiusz Filip (University of Warsaw, Faculty of Economic Sciences); Marcin Gruszczyński (University of Warsaw, Faculty of Economic Sciences); Agata Kałamucka (University of Warsaw, Faculty of Economic Sciences); Tadeusz Kowalski (University of Warsaw, Faculty of Journalism, Information and Book Studies); Waldemar Kozioł (University of Warsaw, Faculty of Management); Magdalena Olender-Skorek (University of Warsaw, Faculty of Management); Krzysztof Opolski (University of Warsaw, Faculty of Economic Sciences); Katarzyna Saczuk (University of Warsaw, Centre of Migration Research); Mateusz Szczurek (University of Warsaw, Faculty of Economic Sciences); Urszula Sztandar-Sztanderska (University of Warsaw, Faculty of Economic Sciences); Kacper Wańczyk (University of Warsaw, Centre for East European Studies); Aleksandra Wiśniewska (University of Warsaw, Faculty of Economic Sciences); Kateryna Zabarina (University of Warsaw, Faculty of Economic Science); Piotr Żoch (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | We study how university students trade off the design and demands of study against expected labor market returns. We conducted a Discrete Choice Experiment (DCE) with students of the Economics Department at the University of Warsaw. Choice alternatives varied the share of in person teaching, weekly class hours, weekly preparation time, language mix (Polish vs. English), net monthly study cost (tuition minus stipends), and expected net salary after graduation. The DCE was embedded in a broader survey measuring study experience, time use, work during studies, scheduling preferences, and perceptions of quality and reputation. The instrument and framings follow state of the art DCE guidance and are publicly documentable. Using multinomial logit and mixed logit models, we estimate compensating differentials students require to accept (i) more online teaching, (ii) more weekly effort (classes/prep), or (iii) English medium instruction in Polish language curricula. The results show large, precise utility gains from higher expected salary, disutility from higher weekly preparation time, and strong (non linear) preferences over delivery mode and language. We then simulate policy scenarios (e.g., introducing 50% online, adjusting effort) and quantify the cost equivalent or salary equivalent levers needed to maintain program attractiveness. We position our results in the international literature on DCEs in higher education and discuss external validity with respect to a large national DCE that emphasized earnings over prestige. We conclude with program design implications for universities worldwide navigating hybridization, workload calibration, and language policy in light of students’ revealed economic preferences. |
| Keywords: | discrete choice experiment, higher education, hybrid/online vs. in-person, language of instruction, student workload, willingness-to-pay |
| JEL: | I23 I21 C25 C83 D12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2025-31 |