nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2025–06–30
nine papers chosen by
Alexander Harin


  1. From Axioms to Algorithms: Mechanized Proofs of the vNM Utility Theorem By Li Jingyuan
  2. Competition and Collusion in Two-Sided Markets with an Outside Option By Cristian Chica; Yinglong Guo; Gilad Lerman
  3. Martingale Consumption By Peter Holm Nielsen
  4. Delegation with Costly Inspection By Mohammad T. Hajiaghayi; Piotr Krysta; Mohammad Mahdavi; Suho Shin
  5. Positive endogenous ethics: Smith's unique contribution to moral analysis By Witztum, Amos
  6. Statistical Decision Theory with Counterfactual Loss By Benedikt Koch; Kosuke Imai
  7. Mean Field Games without Rational Expectations By Benjamin Moll; Lenya Ryzhik
  8. Estimating Behavioral Inattention By Jonathan Benchimol; Lahcen Bounader; Mario Dotta
  9. Two kinds of political economy: Utility-individualism vs. choice-individualism By Vanberg, Viktor

  1. By: Li Jingyuan
    Abstract: This paper presents a comprehensive formalization of the von Neumann-Morgenstern (vNM) expected utility theorem using the Lean 4 interactive theorem prover. We implement the classical axioms of preference-completeness, transitivity, continuity, and independence-enabling machine-verified proofs of both the existence and uniqueness of utility representations. Our formalization captures the mathematical structure of preference relations over lotteries, verifying that preferences satisfying the vNM axioms can be represented by expected utility maximization. Our contributions include a granular implementation of the independence axiom, formally verified proofs of fundamental claims about mixture lotteries, constructive demonstrations of utility existence, and computational experiments validating the results. We prove equivalence to classical presentations while offering greater precision at decision boundaries. This formalization provides a rigorous foundation for applications in economic modeling, AI alignment, and management decision systems, bridging the gap between theoretical decision theory and computational implementation.
    Date: 2025–06
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2506.07066
  2. By: Cristian Chica; Yinglong Guo; Gilad Lerman
    Abstract: We introduce pricing formulas for competition and collusion models of two-sided markets with an outside option. For the competition model, we find conditions under which prices and consumer surplus may increase or decrease if the outside option utility increases. Therefore, neglecting the outside option can lead to either overestimation or underestimation of these equilibrium outputs. Comparing collusion to competition, we find that in cases of small cross-side externalities, collusion results in decreased normalized net deterministic utilities, reduced market participation and increased price, on both sides of the market. Additionally, we observe that as the number of platforms increases in the competition model, market participation rises. Profits, however, decrease when the net normalized deterministic utility is sufficiently low but increase when it is high. Furthermore, we identify specific conditions that quantify the change of price and consumer surplus when the competition increases.
    Date: 2025–05
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2505.06109
  3. By: Peter Holm Nielsen
    Abstract: We propose martingale consumption as a natural, desirable consumption pattern for any given (proportional) investment strategy. The idea is to always adjust current consumption so as to achieve level expected future consumption under the arbitrarily chosen investment strategy. This approach avoids the formulation of an optimization objective based on preferences towards risk, intertemporal consumption, habit formation etc. We identify general explicit solutions in deterministic-coefficient models. In the general case with random coefficients we establish uniqueness, but the question of existence of a solution is unsettled. With the interest rate as the only random factor we derive a PDE for the wealth-to-consumption factor as a function of the state variables, which, however, is non-linear and without known closed-form solutions. We briefly consider the discrete-time case and obtain similar results. Throughout, we compare with well-known optimal strategies for classical CRRA investors with time-additive utility of consumption and find that under suitable time preferences they may in certain cases achieve martingale consumption simultaneously.
    Date: 2025–05
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2505.20504
  4. By: Mohammad T. Hajiaghayi; Piotr Krysta; Mohammad Mahdavi; Suho Shin
    Abstract: We study the problem of delegated choice with inspection cost (DCIC), which is a variant of the delegated choice problem by Kleinberg and Kleinberg (EC'18) as well as an extension of the Pandora's box problem with nonobligatory inspection (PNOI) by Doval (JET'18). In our model, an agent may strategically misreport the proposed element's utility, unlike the standard delegated choice problem which assumes that the agent truthfully reports the utility for the proposed alternative. Thus, the principal needs to inspect the proposed element possibly along with other alternatives to maximize its own utility, given an exogenous cost of inspecting each element. Further, the delegation itself incurs a fixed cost, thus the principal can decide whether to delegate or not and inspect by herself. We show that DCIC indeed is a generalization of PNOI where the side information from a strategic agent is available at certain cost, implying its NP-hardness by Fu, Li, and Liu (STOC'23). We first consider a costless delegation setting in which the cost of delegation is free. We prove that the maximal mechanism over the pure delegation with a single inspection and an PNOI policy without delegation achieves a $3$-approximation for DCIC with costless delegation, which is further proven to be tight. These results hold even when the cost comes from an arbitrary monotone set function, and can be improved to a $2$-approximation if the cost of inspection is the same for every element. We extend these techniques by presenting a constant factor approximate mechanism for the general setting for rich class of instances.
    Date: 2025–06
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2506.07162
  5. By: Witztum, Amos
    Abstract: There are two elements which make Smith’s ethics unique as well as more universal in nature. The first is that it is a positive theory of ethics in the sense that it is not about what is intrinsically good or just as it is about the way in which people form their opinion about it. The second is that it is embedded in social context in the sense that what lies behind the way in which people form their moral opinion is socially dependent as well as related to the way in which people behave. From an exegetic point of view, this also helps in explaining the dissonance that may exist between Smith’s own views about morals and what he observes as the contemporary prevailing view. Applying this to his economic analysis will yield surprising conclusions which may explain why the Wealth of Nations cannot be seen as a moral advocacy of natural liberty.
    Keywords: ethics; material inequality; social distance; sympathy; utility
    JEL: A12 A13 A31 B12 B31
    Date: 2023–12–31
    URL: https://d.repec.org/n?u=RePEc:ehl:lserod:128564
  6. By: Benedikt Koch; Kosuke Imai
    Abstract: Classical statistical decision theory evaluates treatment choices based solely on observed outcomes. However, by ignoring counterfactual outcomes, it cannot assess the quality of decisions relative to feasible alternatives. For example, the quality of a physician's decision may depend not only on patient survival, but also on whether a less invasive treatment could have produced a similar result. To address this limitation, we extend standard decision theory to incorporate counterfactual losses--criteria that evaluate decisions using all potential outcomes. The central challenge in this generalization is identification: because only one potential outcome is observed for each unit, the associated risk under a counterfactual loss is generally not identifiable. We show that under the assumption of strong ignorability, a counterfactual risk is identifiable if and only if the counterfactual loss function is additive in the potential outcomes. Moreover, we demonstrate that additive counterfactual losses can yield treatment recommendations that differ from those based on standard loss functions, provided that the decision problem involves more than two treatment options.
    Date: 2025–05
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2505.08908
  7. By: Benjamin Moll; Lenya Ryzhik
    Abstract: Mean Field Game (MFG) models implicitly assume "rational expectations", meaning that the heterogeneous agents being modeled correctly know all relevant transition probabilities for the complex system they inhabit. When there is common noise, this assumption results in the "Master equation" (a.k.a. "Monster equation"), a Hamilton-Jacobi-Bellman equation in which the infinite-dimensional density of agents is a state variable. The rational expectations assumption and the implication that agents solve Master equations is unrealistic in many applications. We show how to instead formulate MFGs with non-rational expectations. Departing from rational expectations is particularly relevant in "MFGs with a low-dimensional coupling", i.e. MFGs in which agents' running reward function depends on the density only through low-dimensional functionals of this density. This happens, for example, in most macroeconomics MFGs in which these low-dimensional functionals have the interpretation of "equilibrium prices." In MFGs with a low-dimensional coupling, departing from rational expectations allows for completely sidestepping the Master equation and for instead solving much simpler finite-dimensional HJB equations. We introduce an adaptive learning model as a particular example of non-rational expectations and discuss its properties.
    Date: 2025–06
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2506.11838
  8. By: Jonathan Benchimol; Lahcen Bounader; Mario Dotta
    Abstract: Bounded rationality and limited attention significantly influence expectation formation and macroeconomic dynamics, yet empirical quantification of these behavioral phenomena remains challenging. This paper provides the first cross-country estimation of both micro- and macro-level attention parameters using a structurally identified behavioral New Keynesian model. Employing Bayesian techniques on harmonized data from 22 OECD countries (1996-2019) and ensuring robust parameter identification, we document substantial heterogeneity in behavioral inattention across countries. Our cognitive discounting estimates range from 0.76 to 0.98, with higher values indicating greater attention. We establish three key empirical regularities: (1) attention parameters are positively associated with macroeconomic volatility, supporting rational inattention theory; (2) surprise movements in key macroeconomic variables and online information-seeking behavior significantly influence attention allocation; and (3) institutional quality, particularly government effectiveness, is correlated with attention levels. These findings reveal that attention is both a behavioral and a structural phenomenon, responding to institutional factors and economic conditions. Our results provide an empirical foundation for calibrating country-specific models and yield important implications for the design and transmission of monetary policy under bounded rationality, showing that policy effectiveness may systematically vary with the macroeconomic environment.
    Keywords: cognitive discounting, myopia, attention, Bayesian estimation, behavioral macroeconomics
    JEL: E37 E52 E58 E70 E71
    Date: 2025–06
    URL: https://d.repec.org/n?u=RePEc:een:camaaa:2025-34
  9. By: Vanberg, Viktor
    Abstract: This paper contrasts two kinds of political economy, represented by welfare economics and social choice theory on the one hand and James M. Buchanan's constitutional political economy on the other hand. It posits that the difference between the two kinds has its roots in the different normative premises on which they are based, premises that I refer to as utility- or preference-individualism and choice-individualism respectively. And I show that, because of their different normative starting points, the two kinds of political economy pursue fundamentally different research agendas.
    Date: 2025
    URL: https://d.repec.org/n?u=RePEc:zbw:aluord:319640

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