|
on Utility Models and Prospect Theory |
| By: | Craig S. Webb |
| Abstract: | Discounting of delayed utilities is the guiding principle for evaluating policies with future implications. Many public institutions commit to using a fixed schedule of discount rates. But the decision makers in these institutions change over time. What normative principle justifies using a fixed schedule of discount rates when the tastes of the decision makers are not fixed over time? To address this question, this paper introduces a framework of discounted current utility that separates discounting from changing utility. An axiom of time tradeoff invariance is shown to be the key characterising condition. This is the normative principle that justifies using a given schedule of discount rates, irrespective of whether utility changes over time. We also compare constant discount rates, adopted in US public institutions, with the declining rates adopted by various European institutions. What normative principle separates these approaches? We identify a condition called time tradeoff consistency that characterises discounting at a constant rate. Time tradeoffs are used to derive subjective delay midpoints, which provide a powerful tool for identifying and comparing decreasing impatience across decision makers, who have different utilities, even if both of their utilities change over time. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:man:sespap:2601 |
| By: | Pablo Guerron-Quintana (Boston College; Boston College) |
| Abstract: | This paper proposes a novel equilibrium concept in which agents are fully rational in preferences and constraints but computationally bounded, with decision rules parameterized and improved via stochastic gradient methods applied to simulated expected utility. In a standard RBC model with GHH preferences, we define a Stochastic Gradient Descent equilibrium as a fixed point (in expectation) of the stochastic-gradient update rule together with market clearing and firm optimality. The fixed-point condition requires that the expected gradient of the household’s truncated utility function vanishes at the equilibrium decision rules, so that the agent has no incentive, on average, to revise her policy further. We establish conditions under which the SGD equilibrium converges to the rational expectations solution in the sequential limit as the planning horizon and training intensity increase without bound. Away from this limit, tighter computational budgets generate systematic, state-dependent deviations summarized by an intratemporal labor wedge and an intertemporal capital wedge, whereas large horizon planning and extensive training deliver policies close to the rational expectations benchmark. These wedges are endogenous and time-varying, providing a structural bridge to the business-cycle accounting framework of Chari et al. (2007) without introducing non-productivity shocks or real frictions. |
| Keywords: | bounded rationality, optimization, stochastic gradient descent |
| JEL: | C6 E3 E7 |
| Date: | 2026–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1110 |
| By: | Vanthuyne, Cole |
| Abstract: | Currently, challenges associated with root rots and drought affect the relative advantage of field pea production, and the severity of these challenges is exacerbated by a changing climate. Advances in crop breeding offer potential solutions in the form of new varieties that address these biotic and environmental stressors, but producer adoption is key. In this research, I examine the opportunities and constraints to adoption of field pea in producers’ rotation decisions, with a focus on the impacts of producer perceptions, uncertainty preferences and technology acceptance. Data was collected through an online survey of 461 Western Canadian field crop producers that incorporated a discrete choice experiment (DCE), Tanaka et al.’s (2010) prospect theory game, and Ellsberg’s (1961) two-urns paradox. These methods allowed us to explore how risk, loss, and ambiguity aversion affected demand for varietal attributes—such as climate resilience (root rot resistance and drought tolerance), royalty models (e.g., Variety Use Agreements), and new technologies (e.g., gene editing). Analyzed through a mixed multinomial logit model, the results suggest the inclusion of field pea in the crop rotation is motivated by the benefits of diversification, but the benefits must outweigh the loss of financial certainty or incentives to justify their place in the crop rotation. This motivation is supported with a significant demand found for root rot resistance among risk and ambiguity averse producers within the full sample. Further, loss aversion was found to have significant positive impacts on demand for drought tolerance. The results point towards root rot challenging the financial certainty of pea, whereas in the case of drought tolerance, demand appears to be driven from a search for protection from overall losses, rather than a guarantee of gains. However, uncertainty behaviours are found to have mixed explanatory power over adoption decisions, likely driven by a heterogenous population. The influence of uncertainty is found to be variable between technologies, growing zones, and producer experience with pea. Sub-sample analysis by soil zone and grower type yielded significant but variable results regarding the impact of uncertainty behaviours. Risk, loss, and ambiguity aversion influenced the perceived utility of traits such as root rot resistance and drought tolerance, with the direction and magnitude of these effects differing across sub-samples and traits. A similar pattern is observed among producers exhibiting ambiguity aversion in relation to the adoption of gene-edited varieties, as adoption was found to be limited or increased by a gene-edited designation when ambiguity aversion was present. The presence of Varietal Use Agreements (VUAs) in new varieties is found to significantly limit adoption, with ambiguity aversion magnifying this effect. Overall, there is a demand for climate-resilient traits among sub-samples, however the usage of gene editing and VUA are found to limit adoption within the sample. The variable results by subanalysis highlight the potential importance of localized and heterogenous factors on the demand for agricultural technologies and practices. |
| Keywords: | Environmental Economics and Policy |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ags:peaceg:397831 |
| By: | Bowden, Roger |
| Abstract: | Generalised value at risk (GVaR) adds a conditional value at risk or censored mean lower bound to the standard value at risk and considers portfolio optimisation problems in the presence of both constraints. For normal distributions the censored mean is synonymous with the statistical hazard function, but this is not true for fat-tailed distributions. The latter turn out to imply much tighter bounds for the admissible portfolio set and indeed for the logistic, an upper bound for the portfolio variance that yields a simple portfolio choice rule. The choice theory in GVaR is in general not consistent with classic Von Neumann Morgenstern utility functions for money. A re-specification is suggested to make it so that gives a clearer picture of the economic role of the respective constraints. This can be used analytically to explore the choice of portfolio hedges. |
| Keywords: | Admissible set, Censored mean, Conditional value at risk, Effective utility functions, Generalised value at risk, Hazard functions, Hedging, Portfolio choice, Value at risk, |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:vuw:vuwecf:33502 |
| By: | Marco Francesconi; Cheti Nicoletti; Khushboo Surana |
| Abstract: | We study the role of gender role attitudes (GRA)-beliefs about appropriate roles for men and women-in marital sorting and intra-household allocations. Using the UK Household Longitudinal Study and a multidimensional matching model, we estimate the contribution of GRA to the joint marriage utility alongside age, education, BMI, height, health, personality traits, and risk preferences. We find that sorting on GRA is quantitatively important: its contribution to the joint utility is comparable in magnitude to that of education. We apply a decomposition that identifies three main indices underlying the joint utility, with GRA loading heavily on one of the dominant indices jointly with age and education. This GRA-related index strongly predicts subsequent allocations within marriage, including spouses' shares of housework, childcare, earnings, and paid labor. These findings indicate that GRA are a central dimension of assortative matching and play a meaningful role in shaping intra-household behavior and gendered labor market outcomes. |
| Keywords: | Marital Matching, Gender Role Attitude, Intrahousehold Allocations |
| JEL: | D13 J12 J16 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26069 |
| By: | Odermatt, Reto; Sisso, Itay; Brun, Fanny; Scheibehenne, Benjamin |
| Abstract: | A fundamental assumption in consumer behavior is that opportunity cost is only relevant in the decision-making process and does not matter for utility once the decision is made. In this study, we question this assumption and consider the possibility that opportunity cost negatively impacts the satisfaction derived from a chosen option. In a series of hypothetical and real choice experiments, we provide evidence that opportunity cost significantly decreases consumers’ happiness after the choice. |
| JEL: | D01 D12 I31 |
| Date: | 2026–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:bsl:wpaper:2026/01 |
| By: | Bowden, Roger; Zhu, Jennifer |
| Abstract: | Fund and other investments often exhibit longer run volatility associated with macroeconomic or other dynamics to an extent inconsistent with the efficient market accumulation model. Volatility and performance models or metrics based on one-period returns or simple extensions can fail to pick up this, resulting in sub-optimal investment policies, or welfare losses if exit happens to be forced at the wrong time. We show how to use wavelet analysis to resolve problems of detection, attribution and welfare measurement, including assigning volatility metrics and path risk, while dynamic value at risk ideas can be applied to establish clearance points relative to any benchmark comparator path. Generalisations of the spectral utility function can guide investment policy or be used to design optimal portfolios. Band pass portfolios can be designed that smooth investor exposure to long or short run instabilities in investment value. |
| Keywords: | Band pass portfoilios, Path risk, Portfolio theory, Spectral utility functions, Long term volatility, Value at risk, |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:vuw:vuwecf:33488 |
| By: | Ghaderi, Mohammad; Seo, Sang Byung; Shaliastovich, Ivan |
| Abstract: | We identify desirable/undesirable inflation outcomes under subjective beliefs by comparing surveybased and risk-adjusted distributions of inflation. Intuitively, investors dislike inflation at both extremes, preferring a range in the middle. This "good inflation" region, which investors associate with lower-than-average marginal utility, varies substantially over time in position and width, revealing time-varying preferences across inflation ranges. Different ranges contribute to the inflation risk premium with mixed signs, offsetting each other and often masking important insights into the pricing of inflation risk. We rationalize these empirical patterns using a model where investors learn and update beliefs about hidden deflationary and inflationary recession states. |
| Keywords: | Inflation Options, Learning, Subjective Beliefs, Density Forecasts, Good/Bad Inflation Ranges |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:340186 |
| By: | Guillaume Bied; Philippe Caillou; Bruno Crépon; Christophe Gaillac; Elia Pérennes; Michèle Sebag |
| Abstract: | Recommendation systems (RSs) are increasingly used to guide job seekers on online platforms, yet the algorithms currently deployed are typically optimized for predictive objectives such as clicks, applications, or hires, rather than job seekers' welfare. We develop a job-search model with an application stage in which the value of a vacancy depends on two dimensions: the utility it delivers to the worker and the probability that an application succeeds. The model implies that welfare-optimal RSs rank vacancies by an expected-surplus index combining both, and shows why rankings based solely on utility, hiring probabilities, or observed application behavior are generically suboptimal, an instance of the inversion problem between behavior and welfare. We test these predictions and quantify their practical importance through two randomized field experiments conducted with the French public employment service. The first experiment, comparing existing algorithms and their combinations, provides behavioral evidence that both dimensions shape application decisions. Guided by the model and these results, the second experiment extends the comparison to an RS designed to approximate the welfare-optimal ranking. The experiments generate exogenous variation in the vacancies shown to job seekers, allowing us to estimate the model, validate its behavioral predictions, and construct a welfare metric. Algorithms informed by the model-implied optimal ranking substantially outperform existing approaches and perform close to the welfare-optimal benchmark. Our results show that embedding predictive tools within a simple job-search framework and combining it with experimental evidence yields recommendation rules with substantial welfare gains in practice. |
| Keywords: | Job Recommender Systems, Matching, Experiments, Machine Learning |
| JEL: | J64 J68 L86 C78 C55 C61 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26091 |
| By: | Bowden, Roger |
| Abstract: | Decisions to modify the firm's natural exposure by using derivatives should be referenced back to the maximisation of corporate value. Every firm has a natural exposure to adversity, costs that typically start well in advance of bankruptcy. The implicit value of the resulting adversity or hazard options extends a long shadow over corporate value, even in better states, and this is what hedging is designed to neutralise. The framework is used to integrate corporate value maximisation, value at risk and expected utility theory. Value at risk can be regarded as a socially imposed devise to neutralise the shareholders' limited liability exit option and will often result in over-hedging. It may be not optimal to hedge in adverse conditions: one should hedge the prospect but not the event. Modifiers such as leverage, exposure uncertainty, market incompleteness, competition and bank regulation can be explored within the same framework. |
| Keywords: | Adversity options, Capital adequacy, Conditional value at risk, Corporate value, Non Cooperative games, Generalised value at risk, Utility alignment, Hazard options, Hedging, |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:vuw:vuwecf:33498 |
| By: | Geoffrey Heal; Marcella Lucchetta |
| Abstract: | We explore how pro-social preferences interact with asymmetric ambiguity to influence investment decisions. We develop a model where financial returns are ambiguous (e.g., due to policy uncertainties), while social impact returns are risky or less ambiguous. Employing Gilboa-Schmeidler maxmin and Klibanoff-Marinacci-Mukerji smooth ambiguity frameworks, we demonstrate that pro-social motives act as a hedge, mitigating ambiguity aversion and reducing effective hurdle rates for ambiguous assets. This mechanism explains the resilience of impact investing in bridging environmental funding shortfalls and offers policy insights into how blended finance and standardization can convert ambiguity to risk. Distinct from prior work on blended finance structures, this study emphasizes the behavioral hedging role of social preferences in sustainable finance, with implications for accelerating just transitions amid polycrises. |
| JEL: | D81 G11 O13 Q56 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35116 |
| By: | Gorodnichenko, Yuriy (University of California, Berkeley); Kudlyak, Marianna (Federal Reserve Bank of San Francisco, Hoover Institution, CEPR, IZA); Lobozynska, Sophia (Ivan Franko National University of Lviv); Skomorovych, Iryna (Ivan Franko National University of Lviv); Vladychyn, Ulyana (Ivan Franko National University of Lviv); Kovalyuk, Andriy (Ivan Franko National University of Lviv); Snovydovych, Iryna (Ivan Franko National University of Lviv) |
| Abstract: | We elicit reservation wage premia for relocating to two Ukrainian cities, using a household survey conducted in mid-April to mid-July 2024 during the Russian invasion of Ukraine: high-risk Kharkiv (near the frontline) and moderate-risk Kyiv. Risk tolerance is a strong predictor of willingness to move to Kharkiv - the most risk-averse have roughly half the odds of the most risk-tolerant - but matters much less for Kyiv. This asymmetry is difficult to reconcile with the hypothesis that risk tolerance merely proxies for general mobility preferences. Separately estimating the elasticity of intertemporal substitution (EIS~0.04), we find that including it renders risk tolerance insignificant for Kyiv but not for Kharkiv - a pattern illuminated by the Epstein-Zin separation of risk aversion and the EIS: risk aversion adds predictive power only when danger is high, while the EIS operates equally for both cities as a common relocation-cost channel. The very low EIS implies that relocation incentives structured as future benefits may be ineffective; frontloaded subsidies are more likely to influence behavior. |
| Keywords: | risk preferences, elasticity of intertemporal substitution, migration, compensating differentials, Ukraine, war |
| JEL: | D15 D81 J61 R23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18557 |
| By: | Gleb Kozliakov; Emile A. Marin; Sanjay R. Singh |
| Abstract: | Can idiosyncratic risk explain the equity premium? We revisit this question using a novel measure of imperfect risk sharing, implied by a large class of heterogeneous-agent models, constructed using household-level panel data. We identify a group of households – with relatively high income but low net worth – whose consumption is sufficiently volatile and risky to explain 94% of the observed U.S. Sharpe ratio. In contrast, the consumption dynamics of high net-worth individuals predict a negative Sharpe ratio and so do not constitute the relevant pricing factor, consistent with models featuring wealth motives. |
| Keywords: | uninsurable idiosyncratic risk; heterogeneous agents; wealth dynamics; equity premium |
| JEL: | G12 B52 E21 |
| Date: | 2026–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103059 |
| By: | Steeve Mongrain, Federico Revelli, Tanguy van Ypersele and Roberto Zotti (Simon Fraser University) |
| Abstract: | This paper models theoretically and tests empirically the hypothesis that the decision about the location of a public bad within a multi-tiered structure of government (a facility providing benefits throughout the federation but inflicting damage to the region hosting it) can be driven by strategic electoral considerations exploiting the heterogeneous migration responses to the location of the public bad by voters of different ideologies - a sort of mobility-based gerrymandering. As long as the average utility loss from living close to the public bad is larger for progressives than it is for conservatives, conservative and progressive central governments will pursue opposite strategies. The former locate the public bad in an electorally tight region to induce progressive voters to exit and gain the region for the conservative party, while the latter attempt to spread progressive voters out of safe and into electorally tight regions. An application to waste treatment plant locations across Italian municipalities returns evidence in support of the model’s main hypotheses. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:sfu:sfudps:dp26-07 |
| By: | Michele Belot; Rustam Hakimov |
| Abstract: | We design an intervention to foster social ties at work and evaluate its impact on performance and retention. We run a cluster-randomized field experiment in a large microfinance firm, providing small subsidies for geographically spread offices to organize biweekly social activities over three months. The intervention increases perceived collegiality and workplace friendships by about 0.2-0.25 SD. Individual productivity is unchanged, but office-level team performance in the firm's competition improves in the final intervention month and employee turnover falls by about 4-4.5 pp from a 9-13% baseline in the following months. The pattern is consistent with bonding mitigating free-riding in team tasks and raising job utility as a non-wage amenity; survey evidence suggests an additional role for reciprocity toward the firm. |
| Keywords: | Workplace Collegiality, Climate, Bonding, Field Experiment |
| JEL: | M54 J32 C93 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26033 |
| By: | Alex Imas; Kristof Madarasz; Heather Sarsons |
| Abstract: | This paper presents a new framework for understanding economic nationalism based on an empirically-validated desire for mimetic dominance (or desire through dominance), which generates a preference for exclusionary policies. We incorporate such preferences into a model of international trade. The model predicts that exclusionary preferences lead people to favor tariffs and protectionist policies that harm both their trading partner's and their own consumption. This implies that higher prices caused by exclusionary policies like tariffs will be more acceptable than those caused by non-exclusionary policies. We provide support for these predictions through two survey experiments, which also account for the role of cognitive biases and misinformation. |
| Keywords: | tariffs, behavioral preferences, trade, superiority |
| JEL: | D91 D7 F19 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:25124 |
| By: | Azizbek Tokhirov; Riga Qi; Trang Thanh Tran |
| Abstract: | How does an episode of forced displacement affect the subjective well-being of victims upon their return? To answer this question, we study the weeklong inter-ethnic conflict that occurred in southern Kyrgyzstan in June 2010, using individual survey data for 2006–2019. Our baseline analysis compares conflict-affected displaced individuals with unaffected individuals while controlling for observable characteristics. To address the potential endogeneity of displacement, we complement these estimates with an instrumental-variables strategy based on household-level geographic features, including proximity to conflict-related destruction and the availability of nearby locations suitable for temporary hiding. We also use a difference-in-differences design to trace changes in local subjective well-being over time. Our results show that even short-term displacement is associated with a substantial decline in postconflict subjective well-being. This negative effect is attenuated among individuals who received support from family and friends during displacement. The effects also vary markedly across dimensions of subjective well-being, with the strongest negative impacts observed for satisfaction with dwelling, health, security, and future prospects. Although the subjective well-being of displaced individuals gradually converges toward that of non-displaced individuals, recovery is slow and takes several years. |
| Keywords: | forced displacement, subjective well-being, inter-ethnic conflict |
| JEL: | D6 I31 O15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cer:papers:wp819 |
| By: | GOTOH, Reiko; KAMBAYASHI, Ryo |
| Abstract: | This study addresses a fundamental challenge in the empirical application of the Capability Approach: the measurement of the “capability set” as an opportunity set. Unlike standard utility-based measures that focus solely on achieved outcomes, measuring capability requires assessing the welfare of potential activities—including those not chosen (counterfactuals). We propose a novel methodology that bridges normative social choice theory and econometric causal inference. Specifically, we interpret the Average Treatment Effect (ATE) derived from panel data fixed-effects models as capturing marginal counterfactual welfare differences between alternative actions, rather than level comparisons of achieved outcomes. Using a unique panel dataset of elderly individuals in Japan, focusing on “going-out” versus “staying-home” behavior, we evaluate the size of capability sets and the degree of “unfreedom” (the welfare gap between options). Furthermore, we propose and apply several aggregation rules—ranging from Utilitarian to Rawlsian—to construct group-level capability measures. Our empirical results demonstrate that the ranking of social groups varies significantly depending on the normative aggregation rule employed, highlighting the importance of explicitly defining the informational basis of social evaluation. |
| Keywords: | Capability Approach, Causal Inference, Average Treatment Effect, Social Choice Theory, Unfreedom |
| JEL: | I31 D63 C23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:778 |
| By: | Gotoh, Reiko (Teikyo University); Kambayashi, Ryo (Musashi University) |
| Abstract: | This study addresses a fundamental challenge in the empirical application of the Capability Approach: the measurement of the "capability set" as an opportunity set. Unlike standard utility-based measures, measuring capability requires assessing the welfare of potential activities—including those not chosen. We propose a novel methodology that bridges normative social choice theory and econometric causal inference. Specifically, we interpret the Average Treatment Effect derived from panel data fixed-effects models as capturing counterfactual welfare differences between alternative actions. Using a unique panel dataset of elderly individuals in Japan, focusing on "going-out" versus "staying-home" behavior, we evaluate the size of capability sets and the degree of "unfreedom" as the welfare gap between actions. Furthermore, we propose and apply several aggregation rules, ranging from Utilitarian to Rawlsian, to construct group-level capability measures. Our empirical results demonstrate that the ranking of social groups varies significantly depending on the normative aggregation rule employed, highlighting the importance of explicitly defining the informational basis of social evaluation. |
| Keywords: | capability approach, causal inference, average treatment effect, social choice theory, unfreedom |
| JEL: | I31 D63 C23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18560 |
| By: | Arnab K. Basu; Nancy H. Chau; Gary Lin |
| Abstract: | Why has internal migration remained low, even as advances in communication technologies have reduced information frictions in relocation decisions? This paper develops and estimates a spatial model of mobility that incorporates status quo bias in locational preferences, multilateral search frictions, and comoving regional unemployment. Using historical proxies for search frictions, we identify and recover county-level estimates of status quo bias across the United States. Status quo bias is spatially heterogeneous and highest in states containing large urban job centers. Translating these estimates into expected-utility, geographic-distance, and state-border equivalents indicates that variation in status quo bias generates migration frictions comparable to large geographic and institutional barriers. Status quo bias also exhibits strong persistence over time, a robust relationship to migration dynamics, and associations with a range of non-wage individual- and community-level correlates of locational preferences (e.g., housing, climate, and religious and political orientations). These patterns suggest that status quo bias partly reflects place-based preferences shaped by individuals' residential histories. |
| Keywords: | Migration gravity, status quo bias, and job search networks |
| JEL: | J61 J64 R23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26104 |