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on Utility Models and Prospect Theory |
| By: | Ernesto Rivera Mora (University of Colorado, Boulder); Philipp Strack (Yale University) |
| Abstract: | We study mechanism design for a sophisticated agent with non-expected utility (EU) preferences. We show that the revelation principle holds if and only if all types are EU maximizers: if at least one type is a non-EU maximizer, randomizing over dynamic mechanisms generates a strictly larger set of implementable allocations than using static mechanisms. Moreover, dynamic stochastic mechanisms can fully extract the private information of any type who doesn't have uniformly quasi-concave preferences without providing that type any rent. Full-surplus extraction is possible in a broad variety of non-EU environments, but impossible for types with concave preferences. |
| Date: | 2025–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2481 |
| By: | Alexis Direr (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | I study the allocation problem of investors who hold their portfolio until reaching a target wealth. The strategy suppresses final wealth uncertainty but creates a time horizon risk. I begin with a classical mean variance model transposed in the duration domain, then study a dynamic portfolio choice problem with Generalized Expected Discounted Utility preferences. Using long-term US return data, I show in the mean variance model that a large amount of time horizon risk can be diversified away by investing a significant share of equities. In the dynamic model, more impatient investors are also more averse to timing risk and invest less in equities. The optimal equity share is downward trending as accumulated wealth approaches its target. |
| Keywords: | portfolio choice risk aversion timing risk, portfolio choice, risk aversion, timing risk |
| Date: | 2023–12–29 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05384201 |
| 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, the author has developed a general category-theoretic framework for decision theory. This paper applies this to the category of orthomodular lattices. Every Boolean algebra is an orthomodular lattice, so this yields a new ("syntactic") model of decision-making with classical uncertainty. The lattice of closed subspaces of a Hilbert space is also an orthomodular lattice, so this also yields a new model of decision-making with quantum uncertainty. |
| Keywords: | syntactic decision theory, Boolean algebra, quantum uncertainty |
| Date: | 2025–12–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05398789 |
| By: | Meinhardt, Holger Ingmar |
| Abstract: | Recently, Maggiorano et al. (2025) claimed that they have developed a strongly polynomial-time combinatorial algorithm for the nucleolus in convex games that is based on the reduced game approach and submodular function minimization method. Thereby, avoiding the ellipsoid method with its negative side effects in numerical computation completely. However, we shall argue that this is a fallacy based on an incorrect application of the Davis/Maschler reduced game property (RGP). Ignoring the fact that despite the pre-nucleolus, other solutions like the core, pre-kernel, and semi-reactive pre-bargaining set possess this property as well. This causes a severe selection issue, leading to the failure to compute the nucleolus of convex games using the reduced games approach. In order to assess this finding in its context, the ellipsoid method of Faigle et al. (2001) and the Fenchel-Moreau conjugation-based approach from convex analysis of Meinhardt (2013) to compute a pre-kernel element were resumed. In the latter case, it was exploited that for TU games with a single-valued pre-kernel, both solution concepts coincide. Implying that one has computed the pre-nucleolus if one has found the sole pre-kernel element of the game. Though it is a specialized and highly optimized algorithm for the pre-kernel, it assures runtime complexity of O(n^3) for computing the pre-nucleolus whenever the pre-kernel is a single point, which indicates a polynomial-time algorithm for this class of games. |
| Keywords: | Transferable Utility Game, Pre-Kernel, Pre-Nucleolus, Single-Valuedness of the Pre-Kernel, Fenchel-Moreau Conjugation, Indirect Function, Runtime Complexity, Polynomial-Time Algorithm, Stability Analysis |
| JEL: | C71 |
| Date: | 2025–11–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126932 |
| By: | Kopp, Thomas; Dsouza, Alwin; Mishra, Ashok K. |
| Abstract: | Risk aversion among farmers in developing and emerging economies (DEE) often leads to underinvestment and lower profitability. H owever, c ontract f arming m ay mitigate these negative effects b y p roviding s tability a nd r esources. T his s tudy e xamines the selection of farmers into contract types, hypothesizing that production contract firms prefer risk-averse farmers due to their compliance and adherence to strict guidelines. Using survey data from 660 okra farmers in Karnataka, India, we apply an instrumental variable approach to address endogeneity. The results confirm that risk-averse farmers are disproportionately selected for production contracts, which offer s ignificantly higher profitability t han marketing c ontracts. Moreover, while r sk aversion generally reduces farm profitability, the benefits of production contracts outweigh this disadvantage. These findings suggest that contract farming can improve the economic outcomes of vulnerable farm households. From a policy perspective, facilitating access to production contracts may enhance farm resilience and sustainability. |
| Keywords: | International Development |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:361010 |
| By: | Feldman, Paul; Lee, Siun |
| Abstract: | Myopic loss aversion (MLA)—the tendency to "chase losses"—is a well-documented behavioral bias influencing investment decisions. However, whether groups amplify or mitigate this bias remains unclear. To investigate, we conducted an investment game where participants made decisions both individually and in groups under two conditions: "paper losses" (losses recorded prior to cash-out) and "realized losses" (Imas, 2016). Consistent with prior literature, we replicated the finding that individuals exhibit MLA. More importantly, our experimental evidence shows that group decision-making can intensify MLA rather than alleviate it. By analyzing group conversations with an LLMassisted approach, we identified key social mechanisms—rapid consensus formation, emotional contagion, and a shift toward risk-seeking behavior—that amplify these biases. These findings are significant because they reveal how group dynamics can undermine sound financial decision-making, emphasizing the need for financial literacy programs that address groupthink, shared biases, and emotional contagion and promote structured decision-making frameworks. |
| Keywords: | Labor and Human Capital |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:361193 |
| By: | Pascal Toquebeuf (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: | This paper analyzes a dynamic adverse selection market where buyers hold ambiguous beliefs about seller quality, modeled using neo-additive Choquet capacities and updated via optimistic, pessimistic, and Generalized Bayesian rules. First, we show that the choice of updating heuristic has a direct and systematic effect on the severity of adverse selection. While the optimistic and pessimistic rules invariably mitigate or amplify the problem, respectively, the Generalized Bayesian rule's impact is conditional, its trajectory toward collapse, efficiency, or a stable partial market depending on a persistent 'tug-of-war' between the buyer's static ambiguity attitude and the evolving probabilistic evidence. Our second main finding is that these immediate effects compound over time, leading to fundamentally different market trajectories. The pessimistic rule can drive the market to complete collapse, the optimistic rule can foster full participation, and the Generalized Bayesian path depends on the interplay between the buyer's attitude and the evolving evidence. We further analyze how baseline ambiguity and ambiguity aversion modulate these dynamics, uncovering a complex role for ambiguity in shaping the rate of market evolution. |
| Keywords: | Adverse selection, Neo-additive, Updating, Pessimism, Optimism, Ambiguity |
| Date: | 2025–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05407714 |
| By: | Bonesini, Ofelia; Jacquier, Antoine; Muguruza, Aitor |
| Abstract: | On the one hand, rough volatility has been shown to provide a consistent framework to capture the properties of stock price dynamics both under the historical measure and for pricing purposes. On the other hand, market price of volatility risk is a well-studied object in financial economics, and empirical estimates show it to be stochastic rather than deterministic. Starting from a rough volatility model under the historical measure, we take up this challenge and provide an analysis of the impact of such a non-deterministic risk for pricing purposes. |
| Keywords: | fractional Brownian motion; risk premium; rough volatility |
| JEL: | F3 G3 |
| Date: | 2025–12–11 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130975 |
| By: | Anderson, Andrew; Zhang, Yuan; Thompson, Jada |
| Abstract: | Between 2022 and 2025, highly pathogenic avian influenza (HPAI) affected more than 130 million commercial table egg laying hens in the United States, causing large and sudden decreases in supply and dramatic price increases. Consumer loss aversion may amplify the welfare impact of sudden price increases. This study evaluates the impact of egg price changes on consumer welfare, comparing loss aversion models with baseline results. Using data from the USDA Food-at-Home Monthly Area Price data, we fit a standard and modified almost ideal demand system (AIDS) to estimate demand elasticities which are used in an equilibrium displacement model. Results show baseline consumer surplus losses of $xxxx and $xxxx for the 2022 and 2025 price spike, respectively. When the modified AIDS model is used, results are consistent with loss aversion, and welfare losses increase by X%. Diagnostic testing shows the loss aversion model has superior performance. This study helps policy makers better understand the true welfare impact of HPAI. |
| Keywords: | Marketing |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:360849 |