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on Utility Models and Prospect Theory |
| By: | Christopher G. Lamoureux |
| Abstract: | Parametric portfolio policies may experience estimation risk. I develop a generalized Bayesian framework that updates priors, delivering a posterior distribution over characteristic tilts and out-of-sample returns that is the unique belief-updating rule consistent with the investor's utility function, requiring no model for the return generating process. The Gibbs posterior is the closest distribution to the prior in Kullback-Leibler divergence subject to utility maximization. The posterior's scaling parameter $\lambda$ controls the weight placed on data relative to the prior. I develop a KNEEDLE algorithm to select optimal $\lambda^*$ in-sample by trading off posterior precision against numerical fragility, eliminating the need for out-of-sample validation. I apply this to U.S. equities (1955-2024), and confirm characteristic-based gains concentrate pre-2000. I find that $\lambda^*$ varies meaningfully with risk aversion and depends on higher-order moments. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.02455 |
| By: | Tomasz Strzalecki |
| Abstract: | A utility function has been proposed that values more those lives that are saved by not imposing a harmful treatment and values less those lives that could be saved by treating people who would otherwise die. I do not dispute the ethical motivation behind this kind of asymmetry. However, as my example illustrates, the scope of applicability of such a decision criterion may be limited. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.06820 |
| By: | Dehez, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Pacini, Pier Mario (University of Pisa) |
| Abstract: | We reconsider the formulas defining the nucleolus of a 3-player transferable utility game proposed by Legros (1981) and study its relation to the Shapley value. |
| Keywords: | Core ; Shapley value ; Nucleolus |
| JEL: | C71 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025001 |
| By: | Emanuele Borgonovo; An Chen; Massimo Marinacci; Shihao Zhu |
| Abstract: | We study continuous-time portfolio choice with nonlinear payoffs under smooth ambiguity and Bayesian learning. We develop a general framework for dynamic, non-concave asset allocation that accommodates nonlinear payoffs, broad utility classes, and flexible ambiguity attitudes. Dynamic consistency is obtained by a robust representation that recasts the ambiguity-averse problem as ambiguity-neutral with distorted priors. This structure delivers explicit trading rules by combining nonlinear filtering with the martingale approach and nests standard concave and linear-payoff benchmarks. As a leading application, delegated management with convex incentives illustrates that ambiguity aversion shifts beliefs toward adverse states, limits the range of states that would otherwise trigger more aggressive risk taking, and reduces volatility through lower risky exposure. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08552 |
| By: | Masashi Sekine |
| Abstract: | This thesis develops equilibrium asset pricing models in incomplete markets with a large number of heterogeneous agents using mean field game theory. The market equilibrium is characterized by a novel form of mean field backward stochastic differential equations (BSDEs). First, we propose a theoretical model that endogenously derives the equilibrium risk premium. Agents with exponential preferences are heterogeneous in initial wealth, risk aversion, and unspanned stochastic terminal liability. We solve the optimal investment problem using the optimal martingale principle. The equilibrium is characterized by a mean field BSDE whose driver has quadratic growth in both the stochastic integrands and their conditional expectations. We prove the existence of solutions and show that the risk premium clears the market in the large population limit. Second, we extend the model to include consumption and habit formation, relaxing the time-separability assumption of utility functions. A similar mean field BSDE is derived, and its well-posedness and asymptotic behavior are examined. We also introduce an exponential quadratic Gaussian (EQG) reformulation to obtain equilibrium solutions in semi-analytic form. Finally, the model is extended to partially observable markets where agents must infer the risk premium from stock price observations to determine trading strategies. We provide semi-analytic expressions for the equilibrium via the EQG framework, and the equilibrium risk-premium process is constructed endogenously using Kalman-Bucy filtering theory. Numerical simulations are included to visualize the resulting market dynamics. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.22058 |
| By: | Giorgio Ferrari; Tim Niclas Sch\"utz |
| Abstract: | In this paper, we study an intertemporal utility maximization problem in which an investor chooses consumption and portfolio strategies in the presence of a stochastic factor and a no-borrowing constraint. In the spirit of the Kim-Omberg model, the stochastic factor represents the excess return of the risky asset and follows an Ornstein-Uhlenbeck process, capturing the mean reversion of expected excess returns-a feature well supported by empirical evidence in financial markets. The investor seeks to maximize expected utility from consumption, subject to the constraint that wealth remains nonnegative at all times. To address the dynamic no-borrowing constraint, we use Lagrange duality to transform the primal problem into a singular control problem in the dual space. We then characterize the solution to the dual singular control problem via an auxiliary two-dimensional optimal stopping problem featuring stochastic volatility, and subsequently retrieve the primal value function as well as the optimal portfolio and consumption plans. Finally, a numerical study is conducted to derive economic and financial implications. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.02820 |
| By: | Marilyn Pease; Mark Whitmeyer |
| Abstract: | We provide a unifying way to analyze how risk aversion changes bidding in auctions by asking which bids become more attractive as bidders become more risk averse. In first-price auctions, under two payoff conditions--winning is never worse than the outside option, and winning with a low bid is preferable to winning only with a high bid--greater risk aversion makes high bids more appealing. In second-price auctions with a known outside option, bidding more increases risk exposure conditional on winning, so greater risk aversion favors lower bids. We show these bid-level forces translate into corresponding equilibrium comparative statics. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.09683 |
| By: | Avner Seror |
| Abstract: | We propose a Random Rule Model (RRM) in which behavior is generated by switching among a small library of transparent, parameter-free decision rules. A differentiable gate learns environment-dependent rule propensities, producing an interpretable mixture over named procedures. We develop a global identification theory based on two verifiable conditions on the observed support. Applied to 10, 000 binary lottery problems, rule-gating substantially outperforms structured neural benchmarks based on expected utility and prospect theory, approaching the most flexible benchmark while remaining highly restrictive under permutation-fit tests, and retains predictive content on an independent dataset. Mechanism diagnostics reveal that extreme-outcome screening, salience, and attention rules carry the largest responsibility weights, with systematic shifts along tradeoff complexity and dispersion asymmetry. Robustness checks confirm that the findings are not driven by the ex-ante library choice, marginal dominance relationships, or the availability of additional regressors. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.04105 |
| By: | Thomas {\AA}stebro; Frank M. Fossen; C\'edric Gutierrez |
| Abstract: | How do entrepreneurs act on their beliefs when probabilities of outcomes are unknown but subjectively perceived? We theorize that two distinct dimensions of ambiguity attitudes influence entrepreneurial action: ambiguity aversion - the unwillingness to bear ambiguity - and ambiguity sensitivity - how individuals discriminate between different levels of perceived chances of success. The second dimension determines how much entrepreneurs adjust their actions based on new information - a distinct aspect that cannot be captured by ambiguity aversion alone. Our theory suggests that entrepreneurs with different growth orientations have different ambiguity attitudes as compared to employees. Using incentivized measures from a large-scale survey, we find that incorporated entrepreneurs exhibit lower ambiguity aversion than employees, indicating that they are more willing to act under ambiguity. Distinctively, unincorporated self-employed individuals show higher ambiguity sensitivity, indicating that their actions are more responsive to changes in their beliefs. These patterns persist after controlling for risk attitudes, optimism, cognitive ability, and demographics. Our results highlight the distinct impacts of ambiguity aversion and ambiguity sensitivity on entrepreneurial actions. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.14148 |
| By: | Emile A. Marin; JiYong Jung (Department of Economics, University of California Davis) |
| Abstract: | We characterize the gap between the equity risk premium (ERP) and its SVIX-implied lower bound as an equilibrium object, increasing in the correlation of valuations and returns, their relative volatility, and risk aversion. Higher risk premia need not be reflected in options-implied volatility. Yet, models resolving the equity premium puzzle through high risk aversion will tend to understate the lower bound and risk-neutral variance of returns. Applying our findings to a RBC economy with disasters, we consider an increase in their probability leading to a 1 p.p. rise in the ERP, but a negligible rise in the SVIX-implied bound (10 b.p.). |
| Date: | 2026–03–19 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:378 |
| By: | Juan CARVAJALINO; Herrade IGERSHEIM |
| Abstract: | This article revisits the debate between John Rawls and John Harsanyi by drawing on newly explored archival materials. Traditionally viewed as a short-lived, technical disagreement of the 1970s over the rational criterion for choice under uncertainty—the maximin versus average utility rules—their exchange in fact spanned nearly four decades, from their first encounter in 1964 to the late 1990s. The paper reconstructs this dialogue to reveal its ethical and philosophical depth, showing that what began as a technical dispute gradually evolved into a confrontation over the moral foundations of justice. The paper traces four stages of this evolving relationship, emphasizing Harsanyi’s later overlooked “philosophical turn” and his continuing attempts to defend utilitarianism against Rawls’s egalitarianism. By revealing all the facets of their exchange, the study enriches our understanding of the modern dialogue between economics and philosophy and of the enduring opposition between utilitarian and egalitarian conceptions of social justice. |
| Keywords: | John Rawls, John Harsanyi, Maximin, Utilitarianism, Social justice. |
| JEL: | B21 B31 D60 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2026-07 |
| By: | Josephine Auer |
| Abstract: | Hedonic models value goods through their characteristics but are typically interpreted under time-separable preferences. This assumption is restrictive: when some attributes are habit forming, observed prices reflect both contemporaneous utility and continuation values from past consumption. I develop a nonparametric revealed preference framework for dynamic hedonic valuation, deriving necessary and sufficient conditions for rationalisability over characteristics. The framework separates restrictions imposed by the hedonic price system from those imposed by intertemporal choice and provides diagnostics that quantify the severity of violations along each margin. Applied to household scanner data, I show that most failures of static hedonic valuation reflect violations of the hedonic price structure; conditional on satisfying this structure, allowing for habit formation improves behavioural fit. This alters the mapping from prices to willingness-to-pay and the implied welfare interpretation. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.02456 |
| By: | Marta Grzeskiewicz |
| Abstract: | We develop a flexible neural demand system for continuous budget allocation that estimates budget shares on the simplex by minimizing KL divergence. Shares are produced via a softmax of a state-dependent preference scorer and disciplined with regularity penalties (monotonicity, Slutsky symmetry) to support coherent comparative statics and welfare without imposing a parametric utility form. State dependence enters through a habit stock defined as an exponentially weighted moving average of past consumption. Simulations recover elasticities and welfare accurately and show sizable gains when habit formation is present. In our empirical application using Dominick's analgesics data, adding habit reduces out-of-sample error by c.33%, reshapes substitution patterns, and increases CV losses from a 10% ibuprofen price rise by about 15-16% relative to a static model. The code is available at https://github.com/martagrz/neural_demand_habit . |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.02331 |
| By: | Guillaume Bied; Philippe Caillou; Bruno Cr\'epon; Christophe Gaillac; Elia P\'erennes; Mich\`ele 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. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.21699 |
| By: | Uzi Segal (Boston College); Zhuzhu Zhou (Xiamen University) |
| Abstract: | In a social choice setting, individuals may be unwilling to aggregate their preferences with what they regard as wrong preferences held by others because they lead to outcomes that harm themselves, harm others, are socially inefficient, or are morally unacceptable. People may still be willing to compromise with those who believe that although such preferences are wrong, society should nonetheless accept them. We offer two methods of two-level aggre- gation for such situations. In the first method, each member of society first aggregates the “corrected” individual preferences, and society then aggregates these aggregated views. In the second method, for each person, society first aggregates everyone’s views about that person’s preferences, and then aggregates the resulting individual “corrected” preferences. If these two methods yield the same social ranking, then the aggregation rule must be the sum of functions of the corrected utilities. |
| Keywords: | Social welfare function; aggregation rule; spurious unanimity |
| JEL: | D70 D30 D60 |
| Date: | 2026–03–16 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1108 |