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on Utility Models and Prospect Theory |
| By: | Whelan, Karl |
| Abstract: | Samuelson (1963) conjectured that accepting multiple independent gambles you would reject on a stand-alone basis violated expected utility theory. Ross (1999) and others presented examples where expected utility maximizers would accept multiple gambles that would be rejected on a stand-alone basis once the number of gambles gets large enough. We show that a stronger result than Samuelson's conjecture applies for DARA preferences over wealth. Expected utility maximizers with DARA preferences have threshold levels of wealth such that those above the threshold will accept N positive expected value gambles while those below will not and these thresholds are increasing with N. |
| Keywords: | Risk aversion |
| JEL: | D81 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19319 |
| By: | David Dillenberger (University of Pennsylvania); Jay Lu (University of California, Los Angeles) |
| Abstract: | We introduce a behavioral notion of domain-specific risk aversion that separates attitudes toward risk from deterministic utility: an agent is more pure risk averse in one domain than in another if, for prizes that are indifferent under certainty, he is more averse to risk in the former domain than in the latter. We develop a model that goes beyond expected utility by allowing risk attitudes to vary across domains, while preserving expected utility within each domain. The domains are subjective and need not be specified in advance; they are identified from choice behavior. We establish uniqueness of the model’s parameters and provide an axiomatic characterization. |
| Keywords: | domain-specific risk aversion; non-expected utility; subjective domains; prize interchangeability |
| JEL: | D81 D91 D80 |
| Date: | 2026–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-011 |
| By: | Francesca Arduini (Institute for Fiscal Studies) |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:26/47 |
| By: | Tatiana Komarova |
| Abstract: | This paper analyzes when choice probabilities reveal rankings of deterministic utility indices in semiparametric discrete choice models. It begins with binary choice, where quantile thresholds guarantee ranking recovery, and shows that such thresholds can arise either from behavioral departures from utility maximization (e.g., limited attention) under exchangeable unobservables, or from non-exchangeable unobservables under standard utility maximization. These behavioral and distributional routes are then extended to multinomial choice. Under limited attention, balance restrictions on attention probabilities yield global linear ranking partitions which are robust to the distribution of unobservables and, given sufficiently rich joint variation in the differences of utility indices, are also necessary. Absent the required attention restrictions, opposite rankings can produce overlapping probability images. Under non-exchangeable unobservables, a comparable distribution-uniform partition generally need not exist. Holding the distribution fixed, however, ranking recovery remains possible via an injective nonlinear map from normalized utility differences to choice probabilities under both behavioral and distributional extensions. Together, the results distinguish distribution-robust global ranking partitions from ranking recovery with a fixed distribution of unobservables and clarify the limits of extending binary quantile restrictions to multinomial choice. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.16708 |
| By: | G. Charles-Cadogan |
| Abstract: | This paper characterizes a class of twice continuously differentiable objective-probability preference representations exhibiting endogenous reference dependence under risk. Weak rank-dependent utility (WRDU) preserves objective probabilities, partitions outcomes at an endogenous reference point, and evaluates lotteries through a gainloss representation in which the reference point maximizes a penalized functional. The first-order condition yields a virtual loss-aversion index equal to the ratio of marginal utilities across the loss and gain domains, recovering both the utility-based index of K\"{o}bberling and Wakker (2005) and the slope ratio of Tversky and Kahneman (1992) as special cases. The main theorem shows that, within a class satisfying affine admissibility, loss-factorization, dispersion monotonicity, and attenuation, the derivative-ratio form is uniquely admissible. In this class, WRDU generates the modal Allais pattern on an admissible region and blocks the Rabin calibration implication through range-dependent attenuation. The result is conditional and does not claim uniqueness over all behavioral models of risky choice. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.27238 |
| By: | Fella, Giulio; Holm, Martin Blomhoff; Pugh, Thomas M. |
| Abstract: | We use administrative data for Norway to estimate an incomplete-market life-cycle model of retired singles and couples with a bequest motive, health-dependent utility, and uncertain longevity and health. We allow the parameters of the bequest utility to differ between households with and without offspring. Our estimates imply a very strong utility of residual wealth (bequest motive), in line with the estimates by Lockwood (2018). The bequest motive accounts for approximately three-quarters of aggregate wealth at age 85. More surprisingly, we estimate similar utility of residual wealth for households with and without offspring. We interpret this as, prima facie, evidence that the utility of residual wealth represents forces beyond an altruistic bequest motive. |
| Keywords: | Retirement; Savings |
| JEL: | D11 D12 D14 E21 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19233 |
| By: | Mogens Fosgerau; Nikolaj Nielsen; Thomas Rasmussen; Rui Yao |
| Abstract: | We provide an estimator for the perturbed utility route choice (PURC) model that works with data at the level of individual trips. The estimator is a nested fixed-point algorithm that combines an upper bias-corrected linear regression problem with a lower individual-level perturbed utility maximization problem. We establish the statistical properties of the microPURC estimator and confirm these results with an experiment using simulated data. Finally, we demonstrate the estimator in practice using a large real-world dataset. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.11464 |
| By: | Joy Buchanan; Joshua Foster |
| Abstract: | Language models increasingly settle real resource tradeoffs on behalf of principals yet their economic preferences remain unobserved. We demonstrate their generation rule is isomorphic to the random utility model of discrete choice. This allows internal logit scores to structurally identify preferences. Estimating risk attitudes across twelve models in a portfolio task reveals universal but heterogeneous risk aversion. Although models reject strictly dominated options, their elicited preferences fail invariance tests and violate the independence of irrelevant alternatives across varying experimental prompts. Finally, fine tuning establishes that a principal can explicitly engineer a target risk attitude. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.26288 |
| By: | Giulio Principi |
| Abstract: | This paper proposes a metric approach to measuring the complexity of lotteries. Starting by observing that degenerate lotteries are the simplest choice alternatives, the complexity of a lottery is evaluated by its distance from the closest degenerate lottery. Equivalently, a lottery is complex when it is difficult to approximate it by a single outcome. Given a metric over outcomes, the complexity index we consider is the minimum average distance between the lottery and one of its best degenerate proxies. The paper provides an axiomatic foundation for this representation, studies its main properties, and compares it with other measures of complexity. It then applies the index to choice under risk through a class of complexity adjusted expected utility preferences. Within this model, we study how complexity affects risk attitudes and consistency with stochastic dominance. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.14464 |
| By: | Lee, Woongki (Yonsei University) |
| Abstract: | Some level of consumption is indispensable for survival. Human well-being, however, depends not only on present consumption but also on the expectation that consumption can be sustained in the future. Traditional economic models do not fully capture this forward-looking psychological dimension. This study revises the standard utility specification by incorporating expectation-based satisfaction. It also recognizes that consumers predict their own future consumption better than researchers do. Because utility depends directly on these private predictions, informational asymmetry matters for empirical asset pricing. The study shows how accounting for this asymmetry can help explain empirically high equity premia and low risk-free rates. |
| Date: | 2026–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:kghzv_v1 |
| By: | Matteo Marsili |
| Abstract: | This note discusses zero-sum games with open-ended innovation, whereby each player may introduce new strategies. The innovation process is modelled as a draw of new strategies form a distribution. It is argued that, under generic conditions, this setting can lead to an everlasting innovation arm race, because the introduction of new technologies of one player increases the marginal utility for technological innovation of the opponent. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.25677 |
| By: | Cremer, Helmuth; Lozachmeur, Jean-Marie |
| Abstract: | We study the design of nonlinear reimbursement rules for expenses on secondary preventive and on therapeutic care. With some probability individuals are healthy and do not need any therapeutic health care. Otherwise they become ill and the severity of their disease is realized and identifies their ex post type. Preventive care is determined ex ante, that is before the health status is determined while curative care is chosen ex post. Insurance benefits depend on preventive and curative care in a possibly nonlinear way, and marginal benefits can be positive or negative. In the first best, achieved when health status is ex post publicly observable, insurance benefits are flat (lump sum payments) and do not depend on expenditures. When the severity of the disease is not observable, so that there is ex post moral hazard, this solution is not incentive compatible (for more healthy individuals). The optimal insurance then implies benefits that increase with both types of care. This is because health expenditures reduce informational rents and they are upward distorted. This relaxes the incentive constraint because less healthy individuals value care more than healthy individuals. Even though preventive care is chosen ex ante, when there is no asymmetry of information, it does have an impact on the incentive constraint and thus on informational rents. This is due to two concurring effects. First, prevention is more effective for the more severely ill. Second, these individuals also have a lower marginal utility of income so that a given level of expenditure on preventive care has less impact on their utility. Finally, when individuals misperceive the benefits of preventive care, our results remain valid, but there is now an extra corrective (Pigouvian) term in the expression for the marginal reimbursement of preventive care. |
| JEL: | I11 I13 I18 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19200 |
| By: | Oleksii Mostovyi; Thaleia Zariphopoulou |
| Abstract: | Completely monotonic inverse marginal (CMIM) utilities, introduced in [MSZ24], constitute a tractable class of preferences that includes many of the most important utility functions used in mathematical finance, such as power and exponential utilities. In stochastically dominant markets, their Bernstein representation induces a hidden linear structure in the dual optimization problem that serves as the foundation for the present analysis. In this paper, we investigate the sensitivity of optimal investment with respect to perturbations of investor preferences within the CMIM class. Exploiting Bernstein's representation theorem, we show that, under stochastic dominance, affine perturbations of Bernstein measures induce an affine representation of the dual value function. As a result, the dependence of the optimization problem on preferences can be analyzed through a scalar budget equation, allowing us to prove analyticity of the associated Lagrange multiplier with respect to the perturbation parameter and to derive convergent analytic expansions of arbitrary order for the primal value function and the optimal terminal wealth, with explicit recursive formulas expressed through Bell polynomials. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.08900 |
| By: | Baqaee, David Rezza; Burstein, Ariel; Koike-Mori, Yasutaka |
| Abstract: | We provide a method to measure welfare, in money-metric terms, taking into account expectations about the future. Our two key assumptions are that (1) the expenditure function is separable between the present and the future, and (2) there are some households that do not face idiosyncratic undiversifiable risk. Our sufficient statistics methodology allows for incomplete markets, lifecycle motives, non-rational expectations, non-exponential time discounting, and arbitrary functional forms. To apply our formulas, we require estimates of the elasticity of intertemporal substitution, goods and services’ prices over time, and repeated cross-sectional information on households’ income, balance sheets, and expenditures. We illustrate our method using the PSID from the United States. We find that static measures overstate cost-of-living increases for most households, particularly younger and poorer households. Our estimates can be used to study the welfare consequences of dynamic stochastic shocks that affect households along different margins and time horizons. For example, we find that involuntary job loss is associated with a 20% reduction in money-metric utility for households younger than 60 years old. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19263 |
| By: | Guerriero, Arthur Zito; Kapeller, Jakob; Ankel-Peters, Jörg |
| Abstract: | The social cost of carbon (SCC) is the central concept of benefit-cost analysis in climate economics. The SCC provides guidance on the urgency of climate policy as it expresses the present value of expected future damages associated with the emission of one additional ton of CO2. This paper summarizes key normative assumptions underlying the calculation of the SCC and illustrates how these crucially affect the magnitude of final estimates. Building on a social welfare framework, we discuss the treatment of risk, time (discounting), and inequality (equity weights). Moreover, we present the normative choices related to how SCC estimates monetize non-market damage, in particular the loss of human lives. Based on a database of 515 studies with original SCC estimates (Tol, 2026), we document how the literature deals with these normative issues. In doing so, we find significant variation in the treatment of normative aspects across studies, but also across different normative dimensions. For instance, while the literature justifies the use of a time discount rate based on the assumption of diminishing marginal utility, equity aspects between countries or regions are often ignored. We conclude by stressing that while the SCC can help structuring societal deliberation about climate policy, greater clarity and transparency on the underlying normative assumptions is necessary. |
| Keywords: | climate change, social welfare, normativity, discounting, distribution, risk, value-neutrality |
| JEL: | D61 D63 Q54 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifsowp:342451 |
| By: | Elia Antoniou |
| Abstract: | This paper examines the source of algorithmic aversion, defined as the unwillingness to accept advice or decisions made by algorithms. Algorithmic aversion is conceptualized as a form of individual partiality, driven either by belief-based factors attributed to differences in perceived ability, or by preference-based factors which reflect a disamenity associated with selecting algorithms. To empirically test the predictions of the model, a preregistered online experiment was conducted, where participants evaluated answers to objective and subjective economic questions, with varying information on whether the source was human or algorithm. The results provide no evidence of algorithmic aversion in the evaluation task: participants did not systematically favor human-generated answers over algorithm-generated ones. These results suggest that algorithmic aversion may not be as robust or uniform as previously assumed. |
| Keywords: | Algorithmic Aversion; Human-AI interaction; Experimental Economics. |
| JEL: | D83 D90 C91 |
| Date: | 2025–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:05-2025 |
| By: | Chengqi Zang (Graduate School of Economics, The University of Tokyo, and Gensyn); Gabriel Andrade (Gensyn); Tomoyuki Nakajima (Faculty of Economics, The University of Tokyo) |
| Abstract: | Prediction-market shares differ from traditional financial products in that, with no information or outside utility, classical delta-neutral Central Limit Order Book (CLOB) market making cannot be financed by payoff-uninformative noise flow. Transaction-level evidence from a major prediction-market CLOB platform shows makers profiting not from spread but from carrying an under-priced side to settlement — the empirical signature of behavioral tail demand rather than classical, randomized noise. We build this tail demand directly into the model and study an LMSR and a CLOB on the same event. A pre-shock CLOB quote inside the common-signal band is picked off; competitive quotes therefore screen informed traders out of the book. CLOB makers earn screening rent by carrying the under-priced side to resolution, while informed flow routes to the LMSR. The venues coexist: the CLOB supplies the tail-demand rent margin that lets the LMSR recover part of its loss to informed flow, and AMM depth moves the CLOB premium with a sign set by maker-side contestability—widening it where standing quotes can be undercut, compressing it where a committed maker carries the book. With three or more outcomes, binary-book CLOBs pin switch prices but leave implied beliefs indeterminate, whereas the LMSR prices the outcome simplex coherently and uses collateral more efficiently. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2026cf1277 |
| By: | Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; Kenny, Geoff |
| Abstract: | We use new euro area representative data from the Consumer Expectations Survey (CES) to elicit household-specific propensities to invest and consume out of positive wealth shocks. Using a randomized assignment of hypothetical lottery gains ranging from €5, 000 to €50, 000 and a realistic menu of consumption, saving and asset choices, we estimate the causal effect of wealth shocks on risky asset ownership and conditional asset shares. Wealth shocks have a positive effect on stockholding (between 8.4 and 12.8 percentage points increase in participation for the largest wealth shock). The majority of households do not participate in the stock market, even after a large increase in wealth. The conditional asset share invested in risky assets is constant for wealth shocks up to €20, 000, and edges up slightly (by at most 2%) for larger prizes. Our evidence is consistent with constant relative risk aversion for the majority of risky asset investors, while we also find important heterogeneity in the level of risk aversion across individuals. |
| Keywords: | Household finance; Stock market participation; Risk aversion; Consumer expectations survey |
| JEL: | D14 G11 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19279 |
| By: | Lee, Woongki (Yonsei University) |
| Abstract: | We analyze strategic interaction among investors by distinguishing between price taking and price setting. The analysis shows that as price setting becomes more prevalent, equilibrium prices fall. Because this lower price benefits price takers as well as price setters, price taking can be understood as free riding on price setting. The gains from the lower price are distributed more heavily toward price takers. This asymmetry creates relative-comparison concerns, which can distort incentives and discourage price setting even when it would increase aggregate utility. We examine this problem through a pricing game and derive implications for strategic behavior and equilibrium outcomes. |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:64nxu_v1 |
| By: | Ling Zhang; Boyan Xing; Zhenyu She; Zixiang Xu |
| Abstract: | Observed risk-taking behavior is often rationalized through expected-utility curvature, yet the curvature required to fit choices in one context can differ sharply from the curvature required in another, a tension highlighted by calibration critiques of expected-utility theory. Finite multiplicative systems often cease to evolve when a lower continuation threshold is reached, whereas standard growth-optimal benchmarks assume uninterrupted continuation. We study a finite-horizon binary multiplicative process in which a fixed exposure is chosen ex ante and paths crossing an absorbing boundary are assigned a residual value. Exact lattice propagation yields the optimal exposure as a function of initial log distance to the boundary, horizon, and residual ratio. Costly absorption compresses exposure below the no-boundary Kelly fraction near the boundary. When interpreted through an unconstrained constant-relative-risk-aversion benchmark, this compression appears as elevated risk aversion. As the residual value approaches the boundary, a local above-Kelly reversal can occur. In this minimal finite-horizon setting, absorbing-boundary geometry is therefore sufficient to generate state-dependent risk-averse-looking behavior without heterogeneous primitive preference parameters. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.28230 |
| By: | Onil Boussim |
| Abstract: | This paper develops a synthetic control estimator for compositional outcomes, vectors of shares generated by an underlying categorical process. Derived from a random utility model with interactive fixed effects on relative systematic utilities, the estimator maps compositions to log-odds, where the standard convex hull condition identifies the counterfactual as a convex combination of donor log-odds. Equivalently, it recovers the Fr\'{e}chet barycenter under the Aitchison metric, the canonical geometry of the simplex (the non-linear space of shares) using a single set of weights across all categories. I also developed a placebo inference procedure based on the Aitchison distance. An application to Pennsylvania's electricity generation mix following the Alternative Energy Portfolio Standard uncovers a large and persistent compositional shift: natural gas exceeds its counterfactual by nearly 60 percentage points by 2022, while renewables lose relative ground. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.16991 |
| By: | Sivasathivel Kandasamy |
| Abstract: | Existing AI governance frameworks, including the EU AI Act and NIST AI RMF, address safety, transparency, and accountability but do not operationalize quantitative constraints on macro-socioeconomic stability. As a result, AI systems may satisfy regulatory requirements while contributing to labor displacement, rising inequality, and reduced economic resilience. We introduce the Human Utility Factor (HUF), a differentiable welfare metric that models the interaction between Agency, Wellbeing, and Economic Stability as functions of three actionable policy levers: automation depth, redistribution intensity, and employment coverage. HUF yields a closed-form optimal automation level and a minimum redistribution threshold below which no level of automation is welfare-positive, transforming high-level governance objectives into computable constraints. We evaluate HUF using a three-agent multi-agent reinforcement learning framework across U.S., Canadian, and Nordic policy regimes. Both analytical and PPO-based agents identify welfare-optimal operating regions and reveal a critical failure mode: welfare metrics that do not explicitly constrain redistribution can converge to high-automation equilibria that satisfy the metric while undermining its intended societal objectives. Our results suggest that AI governance is fundamentally a constrained optimization problem rather than a compliance exercise. HUF provides a quantitative framework for evaluating automation policies, identifying socioeconomic stability boundaries, and supporting governance decisions under accelerating AI deployment. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.26068 |
| By: | Gregorio Curello; Sam Jindani |
| Abstract: | We consider the problem of bargaining when transfers between agents are possible. Such situations are typically modelled as coalitional games with transferable utilities. However this model makes a strong implicit assumption: the outcome can only depend on the total surplus that each coalition of agents can achieve, not on which agents within the coalition generate the surplus. Is this assumption justified? We define a richer model in which solutions may depend on who generates the surplus. In this model, the classical axiomatisation of the Shapley value fails: a broad family of solutions satisfy efficiency, anonymity, the dummy property, and additivity. Nevertheless, we obtain an axiomatisation of the Shapley value in the richer model by adding continuity and individual rationality to the original axioms. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.09232 |
| By: | Athanasios Andrikopoulos; Nikolaos Sampanis |
| Abstract: | The theory of optimal choice sets provides a well-established framework in social choice and game theory. When preferences are cyclic, as often occurs in complex economic environments, the set of maximal elements may be empty, thereby motivating alternative solution concepts such as the von Neumann--Morgenstern (vNM) stable set. In this paper, we study binary relations on infinite sets of alternatives within an order-theoretic and topological framework. Our main result yields a topological characterization of von Neumann--Morgenstern stable maximality: for consistent abstract decision problems satisfying Upper MacNeille Informational Monotonicity, the set of maximal elements is non-empty and stable if and only if there exists a compact topology on \(X\) with respect to which \(R\) is Nachbin closed and upper semicontinuous. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.26559 |