|
on Utility Models and Prospect Theory |
| By: | Victor H. Aguiar |
| Abstract: | Economics uses different behavioural models for risk, time, losses, valuation, and social choice. I study a unified choice experiment in which the same decision makers face all these domains. I hide a decision maker's choices in one domain and ask a frozen tabular foundation model to recover them from that decision maker's choices elsewhere and labelled choices by other participants. The foundation model improves on the training-sample median, and the gain disappears when visible choices are shuffled across decision makers. I then estimate one random-utility model over the foundation model's learned representation. This structural model applies the same utility function in every domain, retains most of the foundation model's reduction in prediction error, predicts domains excluded from utility estimation, and reproduces how behavioural measures co-move across people. The resulting model separates three objects: a learned common choice domain, one systematic utility function on that domain, and one random component that generates stochastic choice on observed menus. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.06842 |
| By: | Kai Wang |
| Abstract: | There is a largely overlooked assumption underlying stochastic choice theory: menus are assigned exogenously, as if by a hidden randomized controlled trial. This assumption is not innocuous, because in many real-world settings menus are assigned endogenously according to the decision makers' preferences. This paper studies Random Utility Model under menu endogeneity and shows that any seemingly anomalous choice behavior can be generated by a population of rational decision makers with heterogeneous preferences facing endogenously assigned menus. To address this problem, I propose a new causal estimand: the probability that an alternative would be chosen from a given menu if that menu were presented to the entire population. I then characterize sharp bounds on this estimand using observed menu and choice frequencies. In addition, I show that when choices are observed across multiple markets with different preference distributions and a common menu-assignment rule, the causal estimands from those markets and the menu assignment rule are uniquely identified. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.08218 |
| By: | Ma, Tianyu (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | We analyze first-price sealed-bid auctions with independent private values in which bidders are uncertain about the distribution of their opponents’ valuations and have smooth ambiguity preferences. We characterize the unique non- decreasing symmetric equilibrium, whose bidding function solves a nonlinear ordinary differential equation with an endogenous ambiguity-adjusted distribution. Bids increase in ambiguity aversion, lie between the Bayesian benchmarks generated by the least and most competitive candidate priors, and converge to the maxmin benchmark. Under constant relative ambiguity aversion (CRAA), the equilibrium biding function is explicit. We also compare auction formats. Under an ex ante predictive criterion, the second-price auction dominates under ambiguity neutrality, but sufficiently strong ambiguity aversion reverses the ranking. Under a model-based criterion, the first- price auction performs better in less competitive environments and worse in more competitive ones, while compressing the range of possible revenues. Bidder preferences also depend on ambiguity attitudes: CRAA bidders weakly prefer the second-price auction, whereas bidders with increasing absolute ambiguity aversion weakly prefer the first-price auction. |
| Keywords: | First-price auctions, smooth ambiguity, ambiguity aversion, Knightian uncertainty, auction design, revenue comparison |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:bie:wpaper:769 |
| By: | Ma, Zhenyao; Liang, Yue; Li, Dongxu |
| Abstract: | Inspired by behavioral science, we propose Behavior Learning (BL), a novel general-purpose machine learning framework that learns interpretable and identifiable optimization structures from data, ranging from single optimization problems to hierarchical compositions. It unifies predictive performance, intrinsic interpretability, and identifiability, with broad applicability to scientific domains involving optimization. BL parameterizes a compositional utility function built from intrinsically interpretable modular blocks, which induces a data distribution for prediction and generation. Each block represents and can be written in symbolic form as a utility maximization problem (UMP), a foundational paradigm in behavioral science and a universal framework of optimization. BL supports architectures ranging from a single UMP to hierarchical compositions, the latter modeling hierarchical optimization structures that offer both expressiveness and structural transparency. Its smooth and monotone variant (IBL) guarantees identifiability under mild conditions. Theoretically, we establish the universal approximation property of both BL and IBL, and analyze the M-estimation properties of IBL. Empirically, BL demonstrates strong predictive performance, intrinsic interpretability and scalability to high-dimensional data. Code: https://github.com/MoonYLiang/Behavior-Learning; installable via pip install blnetwork. |
| Keywords: | Behavioral Modeling, Inverse Optimization, Interpretable Machine Learning, Identifiability, Utility Maximization, Energy-Based Models (EBMs) |
| JEL: | A1 C1 C45 D03 |
| Date: | 2025–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128277 |
| By: | Jiehua Xie; Liulei Sun; Wei Zou |
| Abstract: | In this paper, we propose a novel asymptotic fractional-order stochastic dominance rule for ranking prospects over a sufficiently long investment horizon. The new rule formulates the consensus of decision makers whose relative risk aversion has a negative lower bound. Under the assumption that returns are lognormally distributed, we establish equivalent conditions for the proposed rule without imposing the non-negativity constraint on the mean of log-return, a restriction usually required by the existing asymptotic stochastic dominance rules. Furthermore, to enhance the tractability of this asymptotic fractional-order stochastic dominance, we propose a variant of asymptotic fractional-order stochastic dominance with bounded relative risk aversion, referred to as general asymptotic fractional-order stochastic dominance, under an additional condition on decision makers' marginal utilities. We derive its corresponding equivalent distributional characterizations. The (general) asymptotic fractional-order stochastic dominance with bounded relative risk aversion overcomes the shortcomings of the existing asymptotic fractional-order criterion that the fractional-order parameter has no influence on the equivalent distributional conditions. Empirical examples further show the advantages of the newly proposed rules for asset selection in long-term investment decisions. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.15317 |
| By: | Cavapozzi, Danilo; Francesconi, Marco; Nicoletti, Cheti |
| Abstract: | Using UK longitudinal data on dual-earner couples, this paper estimates a model of intrahousehold housework decisions, which combines a randomized experimental framework eliciting counterfactual choices with gender norms differences across ethnicities and cohorts to identify the impacts of individual preferences and gender identity norms. Equal sharing of tasks yields greater utility for both men and women, with women disliking domestic chores as much as men. Although couples would want to use housework arrangements to compensate for differentials in labor market involvement, women end up performing a substantially larger share of housework. This is not due to specialization, rather social norms play a key role. Exposure to more egalitarian gender attitudes significantly increases the probability of choosing an equal share of housework. Were attitudes evened up to the most progressive levels observed in the sample, women doing more housework than their partners would stop to be the norm already among present-day households, except for households with children. |
| Keywords: | Labor supply; Gender gaps |
| JEL: | C25 C26 D13 J16 J22 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19726 |
| By: | Bergemann, Dirk; Gan, Tan; Li, Yingkai |
| Abstract: | We study a sender-receiver game in which the receiver can commit to a decision rule before the sender determines the information policy. We ask how the receiver should commit, in advance, to a rule that maps the information of the sender into decisions-when the receiver knows neither the sender’s true preferences nor the full range of information the sender could supply. To handle this dual uncertainty, we adopt a unified robust framework that nests max-min utility, min-max regret, and min-max competitive ratio as special cases. Across all criteria, the same answer emerges: the optimal rule is always a quota rule. |
| Keywords: | communication;commitment;partial alignment;quota rules;min-max regret;max-min utility;competitive ratio |
| JEL: | D82 D83 |
| Date: | 2026–07–21 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140351 |
| By: | Fujiwara, Ippei; Hirose, Yasuo |
| Abstract: | This paper establishes the connection of exchange rates to macroeconomic fundamentals by estimating a small open-economy model for Canada. The model incorporates an endogenous interest rate spread on foreign bond holdings, enabling the modified uncovered interest rate parity (UIP) condition to exhibit a negative relationship between expected exchange rate depreciation and interest rate differentials, as observed in the data. Given the model’s susceptibility to equilibrium indeterminacy, we estimate it using Bayesian methods that allow for both determinacy and indeterminacy of equilibrium. The results reveal that preference shocks to the household utility function are the primary drivers of exchange rate fluctuations, highlighting the connection between exchange rates and macroeconomic fundamentals. We further demonstrate that both allowing for indeterminacy and selecting a specific equilibrium representation from the data are essential for achieving this finding. |
| Keywords: | Exchange rate disconnect; Indeterminacy; Bayesian estimation |
| JEL: | C62 E32 F31 F41 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19744 |
| By: | Chung-Han Hsieh; Rong Gan |
| Abstract: | We develop a certified, scalable approximation for high-dimensional Wasserstein distributionally robust portfolio optimization. For expected-utility maximization under order-one Wasserstein ambiguity, standard duality yields a semi-infinite convex program. For long-only portfolios with box support under the one-norm ground metric, an exact sample-specific vertex reformulation provides an exponential-size computational benchmark. We then majorize the utility by supporting hyperplanes and dualize the support subproblems, obtaining a finite hyperplane--dual formulation over compact polyhedral supports. Under the one-norm ground metric and polyhedral portfolio constraints, this formulation is a polynomial-size linear program. The uniform utility-approximation error bounds both the robust-value error and the near-optimality gap for the original robust problem. Experiments validate the certified approximation and demonstrate monthly 476-asset rebalancing and computational scalability to 1, 000 assets. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.07032 |
| By: | Hector Chade (Arizona State University); Victoria Marone (Yale University); Amanda Starc (Northwestern University); Jeroen Swinkels (Northwestern University) |
| Abstract: | We analyze a multidimensional screening model in which a principal offers a menu of quality-price pairs to a consumer with multiple dimensions of private information and a quasilinear utility function. We derive necessary conditions for optimality, and use them to provide insight into optimal exclusion, positive trade, and screening. We then recast the problem in terms of incremental quality levels and prices, the so-called demand-profile approach (DPA). Under DPA, the problem decouples across increments and can be solved one at a time. We provide novel conditions under which DPA recovers the solution to the full problem exactly or approximately, and which make the necessary conditions sufficient for optimality: essentially, valuations must be sufficiently correlated across quality increments. Applied to empirical estimates of demand for health insurance, we show that DPA is approximately valid, and we apply it to understand equilibrium outcomes in a monopoly insurance market. |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2541 |
| By: | Collin-Dufresne, Pierre; Daniel, Kent; Saglam, Mehmet |
| Abstract: | A number of papers have solved for the optimal dynamic portfolio strategy when expected returns are time-varying and trading is costly, but only for agents with myopic utility. Non-myopic agents benefit from hedging against future shocks to the investment opportunity set even when transaction costs are zero (Merton 1969, 1971). In this paper, we propose a solution to the dynamic portfolio allocation problem for non-myopic agents faced with a stochastic investment opportunity set when trading is costly. We show that the agent's optimal policy is to trade toward an ``aim'' portfolio, the makeup of which depends both on transaction costs and on each asset's correlation with changes in the investment opportunity set. The speed at which the agent should trade towards the aim portfolio depends both on the shock's persistence and on the extent to which the shock can be effectively hedged. We illustrate the differences in portfolio makeup that result from considering hedging demands of a long-horizon investor using a set of simplified examples, and using a daily trading strategy based on the estimated relation between retail order imbalance and future returns. |
| JEL: | D53 G11 G12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19581 |
| By: | Aurelien Baillon; Francesco Capozza; Vahid Moghani |
| Abstract: | Elicited probabilities conflate latent beliefs, ambiguity attitudes, and response er- ror. We develop a measurement method that identifies these components from noisy subjective-probability data using consequential bets on singleton and union events. Ambiguity weighting is parameterized by two indices (a, b), capturing insensitivity and elevation. A hierarchical Bayesian model places latent beliefs on the simplex, al- lows respondent-level (ai, bi), and treats elicited probabilities as noisy measurements. We implement the method in a randomized information experiment in the Dutch LISS panel, where respondents make incentivized forecasts about a demographically matched virtual twin’s GP utilization. The treatment effect on raw probabilities is imprecise and indistinguishable from zero; model-recovered beliefs show meaningful updating, improving predictive accuracy by 0.026–0.032 Brier points and lowering elevation-based ambiguity aversion, with a smaller and less robust change in likelihood insensitivity. Treatment effects on elicited probabilities need not identify treatment effects on beliefs. |
| Keywords: | subjective probabilities, measurement error, Hierarchical Bayesian Model, ambiguity attitudes, information treatments, virtual twins |
| JEL: | C83 C93 D81 D84 D91 I12 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12856 |
| By: | Paolo Crosetto (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Antonio Filippin (UNIMI - Università degli Studi di Milano = University of Milano) |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05687910 |
| By: | Paolo Crosetto (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Antonio Filippin (UNIMI - Università degli Studi di Milano = University of Milano); Xing-Hua Wang (DUFES - Dongbei University of Finance and Economics, Dalian); Daniel Navarro Martinez (Barcelona School of Economics) |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05687912 |
| By: | Paolo Crosetto (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Antonio Filippin (UNIMI - Università degli Studi di Milano = University of Milano); Xing-Hua Wang (DUFES - Dongbei University of Finance and Economics, Dalian); Daniel Navarro Martinez (Barcelona School of Economics) |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05687914 |
| By: | Victor Gonzalez-Jimenez; Patricio S. Dalton; Charles N. Noussair |
| Abstract: | To enhance workers' motivation, organizations often offer monetary bonuses that are linked to meeting production goals. We argue that when workers set these production goals and are sufficiently loss averse, offering a monetary bonus for goal achievement may backfire. The rationale is as follows: while self-chosen goals can act as reference points that motivate loss-averse workers to increase effort and earnings, a monetary bonus for goal achievement may crowd-out the motivation to set an ambitious goal because workers will not want to miss the bonus offered. Hence, monetary bonuses will induce workers set more conservative goals, attenuating the motivational effects of goal setting. We show experimental evidence consistent with this mechanism. |
| Keywords: | Loss aversion, Goals, Monetary and Non-monetary incentives |
| JEL: | D86 D90 C91 D81 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:exc:wpaper:2024-03 |