nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2023‒09‒18
twelve papers chosen by
Alexander Harin, Modern University for the Humanities

  1. Degree Centrality, von Neumann-Morgenstern Expected Utility and Externalities in Networks By René Van Den Brink; Agnieszka Rusinowska
  2. Repeated Bidding with Dynamic Value By Benjamin Heymann; Alexandre Gilotte; R\'emi Chan-Renous
  3. Computer vision-enriched discrete choice models, with an application to residential location choice By Sander van Cranenburgh; Francisco Garrido-Valenzuela
  4. Exchange rate misalignment and external imbalances: what is the optimal monetary policy response? By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  5. Does courier gender matter? Exploring mode choice behaviour for E-groceries crowd-shipping in developing economies By Oleksandr Rossolov; Anastasiia Botsman; Serhii Lyfenko; Yusak O. Susilo
  6. Eggs When Young, Chicken When Old. Time Consistency and Addiction over the Life Cycle By Piccoli, Luca; Tiezzi, Silvia
  7. Do as I Do: Paternalism and Preference Differences in Decision-Making for Others By Georgia E. Buckle; Wolfgang J. Luhan
  8. The Price of Macroeconomic Uncertainty: Evidence from Daily Options By Juan M. Londono; Mehrdad Samadi
  9. The Expected Shapley value on a class of probabilistic games By Surajit Borkotokey; Sujata Gowala; Rajnish Kumar
  10. An Experimental Analysis of In-Group Favoritism and Out-Group Discrimination in the Gain and Loss Domain By Armenak Antinyan; Tigran Aydinyan; Anna Ressi; Lilia Wasserka-Zhurakhovska
  11. Risk Management and Derivatives Losses By Vicente García Averell; Calixto López Castañon; Gabriel Levin-Konigsberg; Hillary Stein
  12. Politicians, Trust and Financial Literacy: When Do Politicians Care? By Donato Masciandaro

  1. By: René Van Den Brink (Department of Economics and Tinbergen Institute, VU University, Amsterdam, The Netherlands); Agnieszka Rusinowska (Centre d'Economie de la Sorbonne, CNRS, Université Paris 1 Panthéon-Sorbonne, Paris School of Economics)
    Abstract: This paper aims to connect the social network literature on centrality measures with the economic literature on von Neumann-Morgenstern expected utility functions using cooperative game theory. The social network literature studies various concepts of network centrality, such as degree, betweenness, connectedness, and so on. This resulted in a great number of network centrality measures, each measuring centrality in a different way. In this paper, we aim to explore which centrality measures can be supported as von Neumann-Morgenstern expected utility functions, reflecting preferences over different network positions in different networks. Besides standard axioms on lotteries and preference relations, we consider neutrality to ordinary risk. We show that this leads to a class of centrality measures that is fully determined by the degrees (i.e. the numbers of neighbours) of the positions in a network. Although this allows for externalities, in the sense that the preferences of a position might depend on the way how other positions are connected, these externalities can be taken into account only by considering the degrees of the network positions. Besides bilateral networks, we extend our result to general cooperative TU-games to give a utility foundation of a class of TU-game solutions containing the Shapley value
    Keywords: weighted network; degree; centrality measure; externalities; neutrality to ordinary risk; expected utility function
    JEL: D85 D81 C02
    Date: 2023–08
  2. By: Benjamin Heymann; Alexandre Gilotte; R\'emi Chan-Renous
    Abstract: We consider a repeated auction where the buyer's utility for an item depends on the time that elapsed since his last purchase. We present an algorithm to build the optimal bidding policy, and then, because optimal might be impractical, we discuss the cost for the buyer of limiting himself to shading policies.
    Date: 2023–08
  3. By: Sander van Cranenburgh; Francisco Garrido-Valenzuela
    Abstract: Visual imagery is indispensable to many multi-attribute decision situations. Examples of such decision situations in travel behaviour research include residential location choices, vehicle choices, tourist destination choices, and various safety-related choices. However, current discrete choice models cannot handle image data and thus cannot incorporate information embedded in images into their representations of choice behaviour. This gap between discrete choice models' capabilities and the real-world behaviour it seeks to model leads to incomplete and, possibly, misleading outcomes. To solve this gap, this study proposes "Computer Vision-enriched Discrete Choice Models" (CV-DCMs). CV-DCMs can handle choice tasks involving numeric attributes and images by integrating computer vision and traditional discrete choice models. Moreover, because CV-DCMs are grounded in random utility maximisation principles, they maintain the solid behavioural foundation of traditional discrete choice models. We demonstrate the proposed CV-DCM by applying it to data obtained through a novel stated choice experiment involving residential location choices. In this experiment, respondents faced choice tasks with trade-offs between commute time, monthly housing cost and street-level conditions, presented using images. As such, this research contributes to the growing body of literature in the travel behaviour field that seeks to integrate discrete choice modelling and machine learning.
    Date: 2023–08
  4. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: How should monetary policy respond to excessive capital in•ows that appreciate the currency and widen the external de•cit? Using the workhorse two-country open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital in•ows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand. JEL Classification: E44, E52, E61, F41, F42
    Keywords: asset markets and risk sharing, currency misalignment, exchange rate pass-through, international policy cooperation, optimal targeting rules, trade imbalances
    Date: 2023–08
  5. By: Oleksandr Rossolov; Anastasiia Botsman; Serhii Lyfenko; Yusak O. Susilo
    Abstract: This paper examines the mode choice behaviour of people who may act as occasional couriers to provide crowd-shipping (CS) deliveries. Given its recent increase in popularity, online grocery services have become the main market for crowd-shipping deliveries' provider. The study included a behavioural survey, PTV Visum simulations and discrete choice behaviour modelling based on random utility maximization theory. Mode choice behaviour was examined by considering the gender heterogeneity of the occasional couriers in a multimodal urban transport network. The behavioural dataset was collected in the city of Kharkiv, Ukraine, at the beginning of 2021. The results indicated that women were willing to provide CS service with 8% less remuneration than men. Women were also more likely to make 10% longer detours by car and metro than men, while male couriers were willing to implement 25% longer detours when travelling by bike or walking. Considering the integration of CS detours into the couriers' routine trip chains, women couriers were more likely to attach the CS trip to the work-shopping trip chain whilst men would use the home-home evening time trip chain. The estimated marginal probability effect indicated a higher detour time sensitivity with respect to expected profit and the relative detour costs of the couriers.
    Date: 2023–08
  6. By: Piccoli, Luca (University of Trento); Tiezzi, Silvia (University of Siena)
    Abstract: This paper tests whether young and adult smokers have different time preferences, in particular with respect to time consistency. The recent introduction of Tobacco 21 law in the US were in part motivated by allegedly inconsistent time preferences of the young consumers. This research empirically tests this hypothesis using individual cigarettes consumption longitudinal data from RLMS, estimating a quasi-hyperbolic discounting rational addiction model for young and adult smokers separately. While our test rejects time inconsistency in the form of present-bias for both population groups, young smokers are found to discount future utilities much more than adults. From a life-cycle perspective, this is still a form of time inconsistency, which provides partial empirical support to the T21 law motivation, but also highlights how the quasi-hyperbolic discounting formulation might not be able to properly capture long-run time preferences.
    Keywords: rational addiction, smoking behavior, time inconsistency, young vs adult smokers, GMM
    JEL: C23 D03 D12
    Date: 2023–08
  7. By: Georgia E. Buckle (University of Portsmouth); Wolfgang J. Luhan (University of Portsmouth)
    Abstract: We study whether money managers impose their risk preferences onto investments for clients paternalistically and whether they impose them more, the more their client’s risk preference differs from their own. We conduct an online experiment, where participants make an investment decision for themselves and on behalf of another participant (as money managers). When investing for another (the client), we use the strategy method to elicit decisions for every possible investment the other participant could have made for their own payoff, such that money managers have complete information of their client’s risk preference. With this, we systematically manipulate the difference in risk preference between the manager and client within subjects. Overall, we find that money managers do project their risk preferences onto clients’ investments due to paternalism. The manager’s risk preference significantly influenced their investment for others, despite knowing their client’s risk preference, and them having no stake in the decision. Investments were also significantly predicted by the client’s known risk preference, but this was a substantially worse predictor than the managers’ preference. We also find, as predicted, that managers do deviate further from their client’s risk preference, the more that preference differs from their own.
    Keywords: decision making for others, paternalism, risk preferences, experiment
    JEL: C91 D81 G11 G40
    Date: 2023–08–30
  8. By: Juan M. Londono; Mehrdad Samadi
    Abstract: Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and real economic uncertainty. The empirical framework presented in this paper can be used to examine the ex ante pricing of a wide variety of events.
    Keywords: variance risk; uncertainty; risk premium; macroeconomic releases; Federal Open Market Committee (FOMC); inflation; tail risk
    JEL: E44 G1 G12
    Date: 2023–06
  9. By: Surajit Borkotokey; Sujata Gowala; Rajnish Kumar
    Abstract: We study a class of probabilistic cooperative games which can be treated as an extension of the classical cooperative games with transferable utilities. The coalitions have an exogenous probability of being realized. This probability distribution is known beforehand and the distribution of the expected worth needs to be done before the realization of the state. We obtain a value for this class of games and present three characterizations of this value using natural extensions of the axioms used in the seminal axiomatization of the Shapley value. The value, which we call the Expected Shapley value, allocates the players their expected worth with respect to a probability distribution.
    Date: 2023–08
  10. By: Armenak Antinyan; Tigran Aydinyan; Anna Ressi; Lilia Wasserka-Zhurakhovska
    Abstract: While the existence of the in-group bias is a well-researched phenomenon in Economics, the established findings are of limited value for understanding its dynamics in the context of challenging societal and economic times. The aim of this paper is to shed more light on whether intergroup discrimination manifests itself differently in a loss compared to a gain domain (corresponding to periods of economic upturns and downturns). We run an online experiment with natural identities, in which participants allocate money between three recipients who vary in the social distance to the decision-maker. We find that, on average, the in-group favoritism documented in the gain domain vanishes in the loss domain. While this result seems to imply that participants become egalitarian in the loss domain, it is actually driven by out-group favoring allocation types becoming more extreme in their decisions. Overall, the loss domain leads to a stronger polarization regarding the question of how different social groups in the society should be treated.
    Keywords: in-group bias, favoritism, discrimination, gain and loss domain, polarization
    JEL: C99 D30 D63 D91 J10 J15
    Date: 2023
  11. By: Vicente García Averell; Calixto López Castañon; Gabriel Levin-Konigsberg; Hillary Stein
    Abstract: Even though financial risk management has the ability to generate value, the use of financial derivatives among nonfinancial corporations remains limited. We identify a channel that contributes to this limited use: the decoupling of derivatives losses and operational gains. Specifically, firms ex post consider their operational profits separately from their derivatives profits. We explore this phenomenon among firms in Mexico. We use the universe of US dollar Mexican peso currency derivatives transactions in Mexico along with customs data to construct a unique data set on operational exchange rate exposure and financial hedging. We find that contrary to a rational and frictionless benchmark, performance in previous derivatives transactions predicts future derivatives use. Using a regression kink design to measure the impact of decoupling on risk management, we find that when losses from previous transactions increase 1 percentage point, firms become 4.24 percentage points less likely to take out a new derivatives position within 90 days. We provide further evidence that is consistent with decoupling and supports rejecting a net worth channel.
    Keywords: risk management; exchange rates; financial hedging; narrow framing; loss aversion
    JEL: G32 F31
    Date: 2023–07–01
  12. By: Donato Masciandaro
    Abstract: Politicians can be more or less active in pursuing financial-literacy policies. This paper explores the role of financial-literacy policy in modifying the financial-trust endowment of a given population taking the political cost-benefit analysis into account. As, in any period, each incumbent government can design and implement its own financial-literacy policy and as financial-literacy deficits are more likely in a period of financial innovation, we assume that constituencies more or less in favour of such policies are present in a given country. If this is the case, we can show that, in a democracy with political competition, the level of activism in implementing financial-literacy policies is positively associated with financial-instability risks, literacy benefits, and illiteracy costs. Moreover, preferences and constraints motivate the politician in charge. More specifically, a more longer time horizons, lower psychological attitudes towards the status quo, and a higher probability of re-election can increase financial-literacy efforts.
    Keywords: financial literacy, financial trust, fintech, financial crisis, loss aversion, political competition
    JEL: D72 G28 G53 H10 K00
    Date: 2023

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