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on Utility Models and Prospect Theory |
| By: | Marcus Pivato (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | In recent work, we developed a new model of decision-making under uncertainty, which can simultaneously accommodate multiple sources of uncertainty and multiple outcome menus, related by analogies and/or changes in awareness. This framework can also accommodate state spaces and outcome spaces with additional structure (e.g. a topology), as well as decision problems where states and outcomes are not explicitly specified. The present paper axiomatically characterizes a subjective expected utility representation that is "global" in two senses. First: it posits probabilistic beliefs for all uncertainty sources and utility functions over all outcome menus, which simultaneously rationalize the agent's preferences across all possible decision problems, and which are consistent with the aforementioned analogies, symmetries, and awareness levels. Second: it applies in many mathematical environments (i.e. categories), making it unnecessary to develop a separate theory for each one. We illustrate this by applying our representation in several categories (sets, measurable spaces, topological spaces, bounded distributive lattices, Riesz spaces, and Banach algebras), and showing that it delivers utility functions suitable to each one. |
| Keywords: | uncertainty, unawareness, analogy, category theory, Anscombe-Aumann |
| Date: | 2025–12–14 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-05415430 |
| By: | Ali Zeytoon-Nejad |
| Abstract: | Purpose: This paper explores gender differences in two distinct forms of risk aversion -- Payoff Risk Aversion (PaRA) and Price Risk Aversion (PrRA) -- in order to provide a more nuanced understanding of how men and women respond to different types of economic uncertainty. Design/methodology/approach: The study employs a laboratory experiment using Multiple-Choice-List (MCL) risk-elicitation tasks based on both Direct Utility Function (DUF) and Indirect Utility Function (IUF) frameworks. These tasks present stochastic payoffs and stochastic prices, respectively. The analysis uses statistical hypothesis testing to compare gender-specific responses across three experimental designs. Findings: The key results of the study indicate that women typically exhibit higher degrees of PaRA than men, which is a consistent finding with the mainstream literature. However, remarkably, the results from all the three indirect MCL designs show that women typically exhibit lower degrees of PrRA than men, and this result is robust across different MCL designs. The paper also introduces an 'irrationality gap' as the difference between PaRA and PrRA and explores the size of the irrationality gap within either gender group, finding it larger and statistically significant for men, while smaller and statistically insignificant for women. Originality/value: This study is the first to distinguish between PaRA and PrRA in a gender comparison, using experimentally validated methods. It provides new behavioral insights into the nature of gender-specific risk preferences and introduces the irrationality gap as a novel concept with implications for understanding financial decision-making and the design of gender-sensitive economic policies. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.20909 |
| By: | Luca De Gennaro Aquino; Sascha Desmettre; Yevhen Havrylenko; Mogens Steffensen |
| Abstract: | We study a continuous-time portfolio choice problem for an investor whose state-dependent preferences are determined by an exogenous factor that evolves as an It\^o diffusion process. Since risk attitudes at the end of the investment horizon are uncertain, terminal wealth is evaluated under a set of utility functions corresponding to all possible future preference states. These utilities are first converted into certainty equivalents at their respective levels of terminal risk aversion and then (nonlinearly) aggregated over the conditional distribution of future states, yielding an inherently time-inconsistent optimization criterion. We approach this problem by developing a general equilibrium framework for such state-dependent preferences and characterizing subgame-perfect equilibrium investment policies through an extended Hamilton-Jacobi-Bellman system. This system gives rise to a coupled nonlinear partial integro-differential equation for the value functions associated with each state. We then specialize the model to a tractable constant relative risk aversion specification in which the preference factor follows an arithmetic Brownian motion. In this setting, the equilibrium policy admits a semi-explicit representation that decomposes into a standard myopic demand and a novel preference-hedging component that captures incentives to hedge against anticipated changes in risk aversion. Numerical experiments illustrate how features of the preference dynamics -- most notably the drift of the preference process and the correlation between preference shocks and asset returns -- jointly determine the sign and magnitude of the hedging demand and the evolution of the equilibrium risky investment over time. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.21149 |
| By: | Benjamin Avanzi; Debbie Kusch Falden; Mogens Steffensen |
| Abstract: | In high-risk environments, traditional indemnity insurance is often unaffordable or ineffective, despite its well-known optimality under expected utility. This paper compares excess-of-loss indemnity insurance with parametric insurance within a common mean-variance framework, allowing for fixed costs, heterogeneous premium loadings, and binding budget constraints. We show that, once these realistic frictions are introduced, parametric insurance can yield higher welfare for risk-averse individuals, even under the same utility objective. The welfare advantage arises precisely when indemnity insurance becomes impractical, and disappears once both contracts are unconstrained. Our results help reconcile classical insurance theory with the growing use of parametric risk transfer in high-risk settings. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.21973 |
| By: | Alexander M. G. Cox; Daniel Hernandez-Hernandez |
| Abstract: | We consider an agent who has access to a financial market, including derivative contracts, who looks to maximise her utility. Whilst the agent looks to maximise utility over one probability measure, or class of probability measures, she must also ensure that the mark-to-market value of her portfolio remains above a given threshold. When the mark-to-market value is based on a more pessimistic valuation method, such as model-independent bounds, we recover a novel optimisation problem for the agent where the agents investment problem must satisfy a pathwise constraint. For complete markets, the expression of the optimal terminal wealth is given, using the max-plus decomposition for supermartingales. Moreover, for the Black-Scholes-Merton model the explicit form of the process involved in such decomposition is obtained, and we are able to investigate numerically optimal portfolios in the presence of options which are mispriced according to the agent's beliefs. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.24371 |
| By: | Belzil, Christian (Ecole Polytechnique, Paris); Jagelka, Tomáš (University of Bonn) |
| Abstract: | We develop a micro-founded framework to account for individuals' effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we find that observed decision noise responds to the costs and benefits of exerting effort on individual choice tasks as predicted by our model. We estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice. |
| Keywords: | cognitive noise, endogenous effort, stochastic choice models, latent attributes, economic preferences, complexity, experimental design, achievement tests |
| JEL: | D91 C40 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18315 |
| By: | Marcus Pivato (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | A single agent may encounter many sources of uncertainty and many menus of outcomes, which can be combined together into many different decision problems. There may be analogies between different uncertainty sources (or different outcome menus). Some uncertainty sources (or outcome menus) may exhibit internal symmetries. The agent may also have different levels of awareness. In some situations, the state spaces and outcome spaces have additional mathematical structure (e.g. a topology or differentiable structure), and feasible acts must respect this structure (i.e. they must be continuous or differentiable functions). In other situations, the agent might only be aware of a set of abstract "acts", and be unable to specify explicit state spaces and outcome spaces. We introduce a new approach to decision theory that addresses these issues. It posits multiple uncertainty sources and outcome menus, linked by the aforementioned analogies, symmetries, and awareness changes. It makes no assumption about the internal structure of these sources and menus, so it is applicable in diverse mathematical environments (i.e. categories). In this framework, we define a suitable notion of subjective expected utility (SEU) representations, and provide conditions under which such SEU representations are unique. |
| Keywords: | uncertainty, unawareness, analogy, category theory |
| Date: | 2025–12–14 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-05415427 |
| By: | Du, G. |
| Abstract: | We propose a unified axiomatic theory of microeconomics, aiming to establish a new benchmark model that supersedes the traditional Walrasian perfect competition baseline. This framework bridges the theoretical divide between General Equilibrium theory and modern Industrial Organization (IO), offering a more accurate representation of complex economic realities. This theory takes the behavioral rules of firms in real markets as the endogenous mechanism through which market structures are generated, replacing the standard practice of imposing perfect competition, monopoly, and other market forms as exogenous assumptions. Under a set of minimal axioms (consumer utility maximization, firm profit maximization, firm entry/exit mechanisms, and market clearing) and by introducing realistic cost and demand structures (firm-level cost heterogeneity, fixed costs, and demand elasticity, among others), pricing behavior and market structures long treated as exogenous (such as perfect competition and monopoly) are derived endogenously as equilibrium outcomes of firms' profit-maximizing behavior. Within a single framework, the theory nests traditional cost and marginal analysis, game-theoretic approaches to imperfect competition, and the Walrasian general equilibrium model; different regions of the parameter space naturally yield equilibrium outcomes corresponding to perfect competition, monopoly, monopolistic competition, and competitive-fringe structures. Our analysis shows that perfect competition is only a highly symmetric and intrinsically unstable equilibrium point: even small cost differences suffice to push the system toward more common monopoly or oligopoly configurations, while positive feedback mechanisms render these structures stable, helping to explain why market power is not easily competed away. Under empirically observable premises, the theory coherently derives the principal market forms and, in doing so, clarifies the domains of applicability of various classic models. It can also be used to predict which market structures industries will evolve toward under given conditions, providing a unified and operational theoretical foundation for empirical research, industrial policy, and firms' business and competitive strategy decision-making. |
| Keywords: | Unified Market Structure Theory; Endogenous Structural Evolution; Imperfect Competition; Unified General Equilibrium Framework; Network Externalities and Feedback Mechanisms; Pareto Optimality under Heterogeneity |
| JEL: | D40 D41 D42 D43 D50 D85 L11 L12 L13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127096 |
| By: | Tomohito Aoyama; Nobuyuki Hanaki |
| Abstract: | The random incentive system (RIS) is a standard incentive scheme used to elicit preferences in economic experiments. However, it has been shown that RIS may distort observed preferences. We examine the performance of RIS under ambiguity with two sets of experiments, our own and another replicating the main treatments of Baillon et al. (2022a). Contrary to Baillon et al. (2022a), who report a significantly lower proportion of participants revealing strict ambiguity aversion in the treatment with RIS than the one without, we do not find such evidence either in our own or in replication of Baillon et al. (2022a). |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1236rr |
| By: | Rendon, Silvio (Georgetown University) |
| Abstract: | This paper connects classical preference theory to quantitative job search and savings models. We treat job acceptance as a choice between stochastic income lotteries. By integrating Decreasing Absolute Risk Aversion (DARA) and Prudence (DAP), we derive five contributions. First, we prove the standard positive wealth effect on reservation wages is driven by the gap between the risk premium (equating total utilities) and the prudence premium (equating marginal utilities), while resolving value function concavity. Second, a unified theorem shows the wealth effect depends on the stochastic dominance of on-the-job search (OJS) versus unemployed search. We uncover a novel "Investment Fund" regime: when OJS is superior, reservation wages decrease with wealth as agents purchase access to high-growth states. Third, this explains consumption puzzles, showing the high MPC of the unemployed is an endogenous response to background risk. Fourth, we demonstrate an isomorphism between labor and savings: the reservation wage exhibits the same prudence-driven diminishing sensitivity as the consumption function. Fifth, borrowing constraints amplify wealth sensitivity without altering qualitative risk rankings. |
| Keywords: | risk-aversion, consumption, wealth, job search, prudence |
| JEL: | E21 H55 J64 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18320 |
| By: | Tharp, Derek (University of Southern Maine) |
| Abstract: | Nearly one-fourth of Americans claim Social Security at age 62, while only one-in-ten wait until age 70—a pattern that has long puzzled economists who argue delay is financially optimal. This paper develops a series of dynamic programming models to examine whether early claiming reflects mistakes or rational responses to preferences overlooked in standard analyses. Three behavioral factors are incorporated: a claim-retire linkage (a preference to claim benefits at retirement rather than managing a separate "bridge" period); front-loaded consumption preferences (a desire to spend more in the early, active years of retirement); and source-dependent utility (greater comfort spending from regular income like Social Security than drawing down a retirement portfolio). Using Epstein–Zin recursive utility with stochastic investment returns, medical expenditure shocks, mortality risk, policy risk, and bequest motives, results show that incorporating these empirically documented factors substantially lowers optimal claiming ages. Under the full behavioral specification, claiming at 62 is optimal for households with up to $800, 000 in initial wealth—a wealth level that encompasses the vast majority of Americans approaching retirement. Results are qualitatively robust to alternative assumptions about mortality, bequest strength, tax treatment, and spousal or survivor benefits. These findings suggest that widespread early claiming may reflect genuine preferences rather than financial mistakes, though individual circumstances—including wealth, employment status, tax situation, and personal preferences—may provide incentives toward delay. Rather than uniformly prescribing delay, advisors should assess clients' goals, circumstances, and preferences and tailor recommendations accordingly. |
| Date: | 2025–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:wx6jn_v1 |
| By: | Wanxin Dong (School of Finance, Renmin University of China); Jiakun Zheng (Aix-Marseille Univ., CNRS, AMSE, Marseille, France) |
| Abstract: | Prior work finds that individuals are often less prosocial when they can exploit uncertainty as an excuse. In contrast to prior work that largely explores the relevance of excuses in the gain domain, this paper investigates the relevance of excuses in both the loss and gain domains. In our laboratory experiment, participants evaluated risky payoffs for themselves and their partners in either the gain or loss domain, with or without interpersonal trade-offs. We found that participants exhibited excuse-driven risk behaviors in both domains. We also documented significant individual heterogeneity in the degree of excuses, influenced by factors such as individuals’ risk preferences, beliefs about others’ risk preferences, and the size of the risk.We present a self-signaling model that incorporates self-image concerns to explain our experimental findings. We show that excuse-driven risk behavior arises because people misattribute their selfish behavior to risk preferences rather than a reduced level of altruism. |
| Keywords: | Prosocial behavior, Risk preferences, Self-image, Misattribution, Experiment |
| JEL: | D71 D80 D91 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2522 |
| By: | Claudio Daminato; Irina Gemmo |
| Abstract: | Sound retirement planning requires individuals to have precise beliefs about their survival chances. Based on an online survey experiment administered to a representative sample of the US population, we provide first evidence of the patterns of individuals’ uncertainty about their survival probabilities, i.e., survival ambiguity, over the life-cycle. To this end, we devise a novel direct measure of survival ambiguity at the individual level, using the variance of the distribution of subjective survival probabilities. Leveraging experimental variation, we find that providing information about objective survival chances decreases individuals’ degree of survival ambiguity. Further, we show that individuals’ survival ambiguity is strongly negatively associated with individuals’ savings rates. Finally, we provide a realistic life-cycle model of savings and portfolio choice that rationalizes the empirical evidence. Our findings provide an explanation for the observation that many individuals “save too little” for their retirement and support information campaigns about individuals’ objective survival chances in addition to financial education programs to improve retirement security, as survival ambiguity presents a previously unexplored determinant of financial well-being. |
| Keywords: | Life Cycle, Savings Behavior, Subjective Expectations, Survival Ambiguity |
| JEL: | D15 D91 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:rsi:irersi:21 |
| By: | Luigi Ventura; Charles Yuji Horioka |
| 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). |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1297 |
| By: | Kazunori Yakushiji; Jieyi Duan; Nobuyuki Hanaki |
| Abstract: | We conduct a replication experiment of the three main treatments of the debt aversion experiment by Mart´ınez-Marquina and Shi (2024) with student participants. While participants in our experiment choose returnmaximizing strategies much more frequently than those in Mart´ınez-Marquina and Shi (2024), our findings corroborate their observations that participants burdened with debt tend to forego the “certain and maximum profit investment opportunity” in favor of prioritizing debt repayment. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1269r |
| By: | Kazunori Yakushiji; Jieyi Duan; Nobuyuki Hanaki |
| Abstract: | We examine the robustness of the results of the three main treatments of the debt aversion experiment by Mart´ınez-Marquina and Shi (2024). While the original experiment is conducted on Amazon Mechanical Turk, we employ student participants. While participants in our experiment choose returnmaximizing strategies much more frequently than those in Mart´ınez-Marquina and Shi (2024), our findings corroborate their observations that participants burdened with debt tend to forego the “certain and maximum profit investment opportunity” in favor of prioritizing debt repayment. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1269rr |