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on Utility Models and Prospect Theory |
| By: | Franz Dietrich (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, Paris School of Economics, CNRS) |
| Abstract: | Economists routinely measure individual welfare by (von-Neumann-Morgenstern) utility, for instance when analysing welfare intensity, social welfare, or welfare inequality. Is this welfare measure justified? Natural working hypotheses turn out to imply a different measure. It overcomes familiar problems of utility, by faithfully capturing non-ordinal welfare features, such as welfare intensity ?despite still resting on purely ordinal evidence, such as revealed preferences or self-reported welfare comparisons. Social welfare analysis changes when based on this new individual welfare measure rather than utility. For instance, Harsanyi?s ?utilitarian theorem?now supports prioritarianism. We compare the standard utility-based versions of utilitarianism and prioritarianism with new versions based on our welfare measure. We show that utility is a hybrid object, determined by two rival in?uences: welfare, and the attitude to intrinsic risk, i.e., to risk in welfare. A new version of Harsanyi?s theorem shows that Harsanyi implicitly makes the questionable assumption that society is neutral to intrinsic risk, even when all individuals are averse to intrinsic risk |
| Keywords: | welfare; utility; risk attitude; social welfare; utilitarianism; Harsanyi-Sen debate; Harsanyi's Theorem |
| JEL: | D00 D60 D63 D69 D70 D80 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:25003r |
| By: | Hammitt, James K. |
| Abstract: | Weighted benefit-cost analysis is receiving increased attention as a method to incorporate concerns about the distribution of policy effects across individuals. Weights are intended to reflect interpersonal differences in the effect of income on wellbeing (the marginal utility of income) and the social value of improving the wellbeing of different individuals. Lacking an objective method for comparing differences or levels of wellbeing between individuals, multiple approaches to estimating how the marginal utility of income depends on income or other factors have been developed, but each of these requires strong assumptions that are not always recognized. This suggests that weights must be chosen judgmentally. Holding income constant, weights are likely to be smaller for older people, due to shorter remaining life expectancy and other factors. |
| Keywords: | weighted benefit-cost analysis; social welfare function; wellbeing; marginal utility |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131365 |
| By: | Tan Gan; Yingkai Li |
| Abstract: | We study a screening problem in which an agent privately observes a set of feasible technologies and can strategically disclose only a subset to the principal. The principal then takes an action whose payoff consequences for both players are publicly known. Under the assumption that the possible technology sets are ordered by set inclusion, we show that the optimal mechanism promises the agent a utility that is weakly increasing as the reported set expands, and the choice of the principal maximizes her own utility subject to this promised utility constraint. Moreover, the optimal promised utility either coincides with the agent's utility under the complete information benchmark or remains locally constant, with the number of constant segments bounded by the number of downward-sloping segments of the complete information benchmark. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2601.15580 |
| By: | Mohammad Ghaderi |
| Abstract: | This paper introduces the attention-entropy random utility (AERU) model, a behavioral model of discrete choice in which a decision-maker endogenously allocates attention across subsets of attributes in order to increase subjective confidence by reducing ex post choice uncertainty, and subsequently chooses an option based solely on the attended information. By endogenizing attention, the decision problem is reformulated from "which alternative to choose" to "which informational cues to process, " with the observed choice emerging as the outcome of this attentional allocation. The AERU framework nests random utility model (RUM)-like behavior under transparent conditions, yet it is not restricted by Luce's independence of irrelevant alternatives (IIA), order-independence, or regularity. This flexibility enables AERU to capture key context effects in a disciplined manner and to generate sharp, testable predictions regarding the conditions for each context effect. From an empirical standpoint, AERU preserves the parsimony of the multinomial logit, requiring only a single additional attention parameter. Employing a scalable estimation procedure based on block coordinate ascent combined with a quasi-Newton method, I provide results from computational experiments demonstrating that AERU can produce better in-sample and out-of-sample predictions. Overall, AERU provides a flexible, parsimonious, and interpretable model of boundedly rational choice with a clear behavioral foundation and implications for context effects. |
| Keywords: | context effects, discrete choice, endogenous attention, entropy, random utility, regularity, subjective confidence |
| JEL: | D91 C35 D01 D83 C63 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1552 |
| By: | Jürgen Eichberger; Illia Pasichnichenko (University of Sussex) |
| Abstract: | Blackwell’s theorem relates the value of information to the “informativeness†of the information structure. His analysis applies to decision makers who are expected utility maximizers and know the information structure of the decision problem. When decision makers do not know the information structure precisely, the signal generating process and the posterior distributions are often only partially known. This paper studies preferences of decision makers with partial knowledge about signals and posterior probability distributions. The partial information approach allows us to relate the value of information to the decision maker’s attitude towards ambiguity. We introduce a new concept of informativeness based on the centroid and prove a theorem in the spirit of Blackwell. Furthermore, we characterize the value of information in terms of the preference relation over information structures. Depending on ambiguity attitude the value of information may be negative. |
| Keywords: | Value of information; Ambiguity; Informativeness; Belief functions; Information structure |
| JEL: | D81 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:sus:susewp:0825 |
| By: | Nabil Al-Najjar; Harald Uhlig |
| Abstract: | We propose rational disagreement as a formal framework for analyzing seemingly irrational behavior that can persist despite the wide availability of objective information in a steady-state. Agents are rational in that they correctly anticipate the distribution of aggregate outcomes, yet disagree about which specific individuals perform better than others. Notably, the subjective belief of any individual may be objectively correct. We illustrate the key concepts with a simple entry game. We show how unordered individual outcome distributions can be identified solely from aggregate statistics. We then characterize the resulting game, define its Nash equilibria, and develop a statistical test for the null hypothesis of agreement. Finally, we situate our framework within the broader literature on Bayesian games, behavioral biases, and the rational expectations hypothesis. |
| JEL: | C7 D7 D81 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34727 |
| By: | Marina Agranov; Federico Echenique; Kota Saito |
| Abstract: | We investigate whether risk and time preferences differ when individuals make decisions for others compared to making decisions for themselves. We introduce a novel ``skin in the game'' experimental design, where choices for others incur a direct cost to the decision-maker, ensuring a genuine trade-off between self-interest and surrogate allocation. The modal outcome is that participants are more risk-averse and impatient when choosing for others than for themselves. Our methodology reveals significant heterogeneity, successfully identifying selfish types often missed by the more standard ``no skin in the game'' approaches. The message is nuanced, as even non-selfish participants behave differently when they have skin in the game. Furthermore, our framework yields more consistent behavior and superior out-of-sample predictive power. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2601.14489 |