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on Utility Models and Prospect Theory |
| By: | David Dillenberger; Jay Lu |
| 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. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.29506 |
| By: | Kemal Ozbek |
| Abstract: | Experimental evidence suggests that ambiguity-sensitive choice can vary systematically with the circumstances of a decision. This paper isolates one channel within a stable preference relation: ambiguity weighting may depend on the act's certainty-equivalent level. After the standard Anscombe-Aumann calibration of consequence utility, a set of behavioral axioms yields a unique continuous family of normalized monotone capacities $\{\nu_v\}_{v\in(0, 1)}$. Each nonendpoint act is evaluated by the Choquet integral associated with the capacity at its own interior certainty-equivalent level, while nonendpoint acts on the same indifference surface share the same capacity. Binary event comparisons identify local event weights at each elicited level and trace their cross-level variation, providing tests of the fixed-capacity restriction. Local uncertainty aversion is equivalent to convexity of $\nu_v$ and yields an implicit multiple-priors representation with certainty-equivalent-indexed local cores. Certainty translation invariance holds if and only if the capacity is fixed across levels, recovering the maintained nondegenerate fixed-capacity Choquet expected utility benchmark; global mixture-betweenness yields implicit additive utility, and imposing both restrictions recovers full-support subjective expected utility. The capacity schedule is a reduced-form ambiguity weighting whose variation may reflect changes in ambiguity perception, ambiguity attitude, or both. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.11748 |
| By: | Peter Caradonna; Zachary Raines |
| Abstract: | We develop a theory of measurement scales for utility functions, based on a generalization of the notion of numeraire commodity. Every sufficiently well-behaved utility is denominated in some scale of this form, and conversely, the choice of a compatible scale unit uniquely identifies utilities up to an additive constant. We define a profile of utilities to be interpersonally comparable precisely when they are denominated in a common measurement unit. We study when profiles of comparable utilities exist, as well as how a planner ought to aggregate them, and provide applications to social choice and welfare economics. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.25043 |
| By: | Alexis Akira Toda |
| Abstract: | Concave consumption functions imply a marginal propensity to consume that falls with wealth. I characterize the utility functions that guarantee this property in finite-horizon optimal saving problems with stochastic discounting, returns, income, and borrowing limits. Under conditional impatience---the conditional expected discounted gross return does not exceed one---consumption functions are always concave if and only if inverse absolute prudence, $-u''/u'''$, is concave. When no conditional-impatience restriction is imposed, hyperbolic absolute risk aversion (HARA) is necessary and sufficient for uniform concavity. Thus conditional impatience permits declining marginal propensities to consume for a preference class strictly larger than HARA. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.29488 |
| By: | Brice Corgnet (EM - EMLyon Business School); Yao Thibaut Kpegli (TREE - Transitions Energétiques et Environnementales - UPPA - Université de Pau et des Pays de l'Adour - CNRS - Centre National de la Recherche Scientifique); Jacopo Magnani (NTNU - Norwegian University of Science and Technology [Trondheim] - NTNU - Norwegian University of Science and Technology = Norges Teknisk-Naturvitenskapelige Universitet = Norjan teknis-luonnontieteellinen yliopisto) |
| Abstract: | Our study provides the first causal test of classical and behavioral asset pricing models that incorporate skewness pricing. In line with these models, our experimental markets show that skewness is systematically priced. Our findings also reveal that positively skewed assets available in small supply exhibit negative expected returns, which is consistent with prospect theory, but not with expected utility models. Furthermore, in line with the mechanism underlying prospect theory, we show that the negative returns of the positively skewed asset are most pronounced during market sessions where traders overweight the low probability of receiving a large payoff. |
| Date: | 2026–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05740177 |
| By: | Jordan Roulleau-Pasdeloup |
| Abstract: | I consider a neoclassical growth model with a constant absolute risk aversion (CARA) utility function and derive a global closed form approximation that is arbitrarily precise as the discount rate $\rho$ is close to the population growth rate $n$. I use it to show that the consumption function is strictly concave and that countries can have two different paths converging to the steady-state: front-loading and back-loading. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.20405 |
| By: | Raja El Asri (FSJES Agadir, Université Ibn Zohr = Ibn Zohr University [Agadir]); Abdelaziz Messaoudi (FSJES Agadir, Université Ibn Zohr = Ibn Zohr University [Agadir]) |
| Abstract: | Financial decision-making has conventionally been conceptualized within the classical framework of rational agents functioning in efficient markets. This theoretical construct, represented by Homo economicus, posits that individuals possess complete information, demonstrate consistent behavior, and are solely dedicated to optimizing expected utility. Nevertheless, enduring market anomalies such as bubbles, excessive volatility, and momentum phenomena have called into question this rationalist perspective. These discrepancies underscore that investors frequently operate under the influence of psychological and social determinants rather than pure rationality. Behavioral finance has emerged as a discipline to bridge the existing gaps by synthesizing perspectives from psychology and sociology. It elucidates how cognitive biases, emotional responses, and heuristics such as overconfidence, loss aversion, and herding behavior consistently influence investment decisions. Prospect Theory, for example, illustrates that investors assess gains and losses asymmetrically, frequently resulting in suboptimal decision-making. Contemporary frameworks, such as Andrew Lo's Adaptive Market Hypothesis, endeavor to reconcile classical and behavioral paradigms by conceptualizing markets as evolutionary systems in which rationality evolves in response to shifting environmental conditions. Evidence from emerging economies, such as Morocco, substantiates these observations. Research indicates that investors in Morocco demonstrate analogous behavioral characteristics, particularly overconfidence, herding behavior, and loss aversion that markedly affect their investment results. Integrating classical finance theories with behavioral finance principles facilitates a more nuanced comprehension of financial behavior. Acknowledging both rational analytical frameworks and psychological inclinations enhances the development of superior financial models, more effective policy formulation, and refined decision-making strategies for both investors and managers. |
| Keywords: | Cognitive Biases, Efficient Market Hypothesis, Prospect Theory, Investment Decisions, Morocco, Intuition, Behavioral Finance, Rationality |
| Date: | 2025–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05691219 |
| By: | Harin, Alexander |
| Abstract: | The article discusses an experiment in which subjects must choose between probabilistic and guaranteed outcomes. The so-called "limit" version of this experiment is proposed, which should be carried out for a probability outcome that is as close as possible to 100% probability, namely, so close, the difference between the winning quantities for probabilistic and guaranteed outcomes is much smaller than the minimum currency unit. At the same time, obtaining one of the possible results may force to reconsider generally accepted approaches in behavioral economics. В статье рассмотрен эксперимент, в котором испытуемые должны сделать выбор между вероятностным и гарантированным исходами. Предложен т.н. «предельный» вариант этого эксперимента, который должен проводиться для вероятностного исхода предельно близко к 100% вероятности, а именно, настолько близко, чтобы разница между величинами выигрыша для вероятностного и гарантированного исходов – была много меньше минимальной денежной единицы. При этом, получение одного из возможных результатов способно заставить пересмотреть общепринятые подходы в поведенческой экономике. |
| Keywords: | utility, prospect theory, probability weighting function |
| JEL: | C9 C91 D8 D81 |
| Date: | 2026–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:130961 |