nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒09‒25
fifteen papers chosen by
Alexander Harin
Modern University for the Humanities
  1. Optimal investment with bounded above utilities in discrete time markets By Miklos Rasonyi
  2. Loss Aversion and Seller Behavior: Evidence from the Housing Market: Comment Working Paper By Florent Buisson
  3. Tractable Valuations Under Uncertainty. By József Sákovics (The University of Edinburgh)
  4. Tractable Consumer Choice By Sákovics, József; Friedman, Daniel
  5. Aggregating sets of von Neumann-Morgenstern utilities By Eric Danan; Thibault Gajdos; Jean-Marc Tallon
  6. The gustibus errari (pot)est”:utility misprediction, preferences for well-being and life satisfaction". By Bechetti, Leonardo; Conzo, Pierluigi
  7. CONDORCET MEETS BENTHAM By Marcus Pivato
  8. The Effects of Experience on Preference Uncertainty: Theory and Empirics for Public and Quasi-Public Environmental Goods By Czajkowski, Mikołaj; Hanley, Nick; LaRiviere, Jacob
  9. Asymptotic utilitarianism in scoring rules By Marcus Pivato
  10. Nash equilibria of games when players'preferences are quasi-transitive By Basu, Kaushik; Pattanaik, Prasanta K.
  11. Decision theory without finite standard expected value By Peter VALLENTYNE; Luc LAUWERS
  12. Testing Consumption Optimality using Aggregate Data* By Gomes, Fábio Augusto Reis; Issler, João Victor
  13. Stable Networks in Homogeneous Societies By Tim Hellmann; Jakob Landwehr
  14. Should a Non-Rival Public Good Always Be Provided Centrally? By Nicolas Gravel; Michel Poitevin
  15. On the (De)Stabilizing Effect of Public Debt in a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  1. By: Miklos Rasonyi
    Abstract: We consider an arbitrage-free, discrete time and frictionless market. We prove that an investor maximising the expected utility of her terminal wealth can always find an optimal investment strategy provided that her dissatisfaction of infinite losses is infinite and her utility function is non-decreasing, continuous and bounded above. The same result is shown for cumulative prospect theory preferences, under additional assumptions.
    Date: 2014–09
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1409.2023&r=upt
  2. By: Florent Buisson (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: In an often quoted article, Genesove and Mayer (2001) observe that house sellers are reluctant to sell at a loss, and attribute this finding to loss aversion. I show that loss aversion cannot explain this phenomenon.
    Keywords: Loss aversion; prospect theory; housing market
    Date: 2013–01
    URL: http://d.repec.org/n?u=RePEc:hal:journl:halshs-00786294&r=upt
  3. By: József Sákovics (The University of Edinburgh)
    Abstract: I put forward a concise and intuitive formula for the calculation of the valuation for a good in the presence of the expectation that further, related, goods will soon become available. This valuation is tractable in the sense that it does not require the explicit resolution of the consumer's life-time problem.
    Keywords: distributed choice, quasi-linear utility, value for money.
    JEL: D01 D03 D11 D91
    Date: 2014–09–10
    URL: http://d.repec.org/n?u=RePEc:edn:esedps:247&r=upt
  4. By: Sákovics, József; Friedman, Daniel
    Abstract: We derive a rational model of separable consumer choice which can also serve as a behavioral model. The central construct is [lambda] , the marginal utility of money, derived from the consumer's rest-of-life problem. We present a robust approximation of [lambda], and show how to incorporate liquidity constraints, indivisibilities and adaptation to a changing environment. We fi nd connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive description of consumer choice.
    Keywords: distributed choice, moneysworth demand, value for money,
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:edn:sirdps:533&r=upt
  5. By: Eric Danan (THEMA - THéorie Economique, Modélisation et Applications - université de Cergy-Pontoise); Thibault Gajdos (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR7316); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences. More precisely, we endow individuals ans society with sets of possible von Neumann-Morgenstern utility functions over lotteries. We generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function. This class turns out to be considerably broader for indeterminate than for determinate utilities, where it basically reduces to utilitarianism. In particular, aggregation rules may differ by the relationship between individual and social indeterminacy. We characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities, although they still fail to systematically yield a determinate social utility.
    Keywords: Aggregation ; vNM utility ; indeterminacy ; neutrality ; utilitarianism
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:hal:journl:halshs-00788647&r=upt
  6. By: Bechetti, Leonardo; Conzo, Pierluigi (University of Turin)
    Abstract: The life satisfaction literature generally focuses on how life events affect subjective well-being. Through a contingent valuation survey we test whether well-being preferences have significant impact on life satisfaction. A sample of respondents is asked to simulate a policymaker decision consisting in allocating scarce financial resources among 11 well-being domains. Consistently with the utility misprediction hypothesis, we find that the willingness to invest more in the economic well-being domain is negatively correlated with life satisfaction. Our findings are shown to be robust when we account for unobservables related to economic fragility and non-random sample selection. Revers e causality and omitted variable bias are controlled for with instrumental variables and a sensitivity analysis on departures from exogeneity assumptions. Subsample estimates document that the less educated are more affected by the problem.
    Date: 2014–07
    URL: http://d.repec.org/n?u=RePEc:uto:dipeco:201421&r=upt
  7. By: Marcus Pivato (Université de Cergy-Pontoise, THEMA and Department of Mathematics, Trent University, Canada)
    Abstract: We show that if the statistical distribution of utility functions in a population satisfies a certain condition, then a Condorcet winner will not only exist, but will also maximize the utilitarian social welfare function. We also show that, if people's utility functions are generated according to certain plausible random processes, then in a large population, this condition will be satisfied with very high probability. Thus, in a large population, the utilitarian outcome will be selected by any Condorcet consistent voting rule. In particular, it will be the subgame-perfect equilibrium outcome of several voting games.
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:ema:worpap:2014-17&r=upt
  8. By: Czajkowski, Mikołaj; Hanley, Nick; LaRiviere, Jacob
    Abstract: This paper develop and estimates a model of demand estimation for environmental public goods which allows for consumers to learn about their preferences through consumption experiences. We develop a theoretical model of Bayesian updating, perform comparative statics over the model, and show how the theoretical model can be consistently incorporated into a reduced form econometric model. We then estimate the model using data collected for two environmental goods. We find that the predictions of the theoretical exercise that additional experience makes consumers more certain over their preferences in both mean and variance are supported in each case.
    Keywords: discrete choice experiment, preference learning, stated preferences, Bayesian updating, generalized multinomial logit, scale, scale variance,
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:edn:sirdps:572&r=upt
  9. By: Marcus Pivato (Université de Cergy-Pontoise, THEMA and Department of Mathematics, Trent University)
    Abstract: Given a large enough population of voters whose utility functions satisfy certain statistical regularities, we show that voting rules such as the Borda rule, approval voting, and evaluative voting have a very high probability of selecting the social alternative which maximizes the utilitarian social welfare function. We also characterize the speed with which this probability approaches one as the population grows.
    Keywords: utilitarian; relative utilitarian; approval voting; Borda; scoring rule.
    JEL: D63 D71
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:ema:worpap:2014-16&r=upt
  10. By: Basu, Kaushik; Pattanaik, Prasanta K.
    Abstract: Much of game theory is founded on the assumption that individual players are endowed with preferences that can be represented by a real-valued utility function. However, in reality human preferences are often not transitive. This is especially true for the indifference relation, which can lead an individual to make a series of choices which in their totality would be viewed as erroneous by the same individual. There is a substantial literature that raises intricate questions about individual liberty and the role of government intervention in such contexts. The aim of this paper is not to go into these ethical matters but to provide a formal structure for such analysis by characterizing games where individual preferences are quasi-transitive. The paper identifies a set of axioms which are sufficient for the existence of Nash equilibria in such'games.'
    Keywords: Disease Control&Prevention,Economic Theory&Research,Teaching and Learning,Information Security&Privacy,Biodiversity
    Date: 2014–09–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:7037&r=upt
  11. By: Peter VALLENTYNE; Luc LAUWERS
    Date: 2014–09
    URL: http://d.repec.org/n?u=RePEc:ete:ceswps:ces14.27&r=upt
  12. By: Gomes, Fábio Augusto Reis; Issler, João Victor
    Abstract: This paper tests the optimality of consumption decisions at the aggregate level taking intoaccount popular deviations from the canonical constant-relative-risk-aversion (CRRA) utilityfunction model-rule of thumb and habit. First, based on the critique in Carroll (2001) andWeber (2002) of the linearization and testing strategies using euler equations for consumption, weprovide extensive empirical evidence of their inappropriateness - a drawback for standard rule-of-thumb tests. Second, we propose a novel approach to test for consumption optimality in thiscontext: nonlinear estimation coupled with return aggregation, where rule-of-thumb behaviorand habit are special cases of an all encompassing model. We estimated 48 euler equationsusing GMM. At the 5% level, we only rejected optimality twice out of 48 times. Moreover,out of 24 regressions, we found the rule-of-thumb parameter to be statistically significant onlytwice. Hence, lack of optimality in consumption decisions represent the exception, not the rule.Finally, we found the habit parameter to be statistically significant on four occasions out of 24.
    Date: 2014–09–10
    URL: http://d.repec.org/n?u=RePEc:fgv:epgewp:756&r=upt
  13. By: Tim Hellmann (Center for Mathematical Economics, Bielefeld University); Jakob Landwehr (Center for Mathematical Economics, Bielefeld University)
    Abstract: We study the structure of pairwise stable networks from a very general point. Rather than assuming a particular functional form of utility, we simply assume that the society is homogeneous, i.e. that agents’ utilities differ only with respect to their network position while their names do not matter. Existence of certain stable network structures is then implied by fairly general assumptions on externalities between links. Depending on the form of link externalities, either the empty or complete network are always pairwise stable, stable symmetric networks exist, or stable networks with a connected subgroup exist. If the society becomes more homogeneous, then it is possible to characterize the set of all pairwise stable networks: they are nested split graphs (NSG). We illustrate these results with many examples from the literature, including utility profiles that depend on centrality measures such as Bonacich centrality. In particular, for low discount factors every pairwise stable network is an NSG if utility is given by Bonacich centrality.
    Keywords: Network Formation, Pairwise Stability, Existence, Homogeneity, Convexity, Strategic Complements, Bonacich Centrality
    JEL: A14 C72 D85
    Date: 2014–08
    URL: http://d.repec.org/n?u=RePEc:bie:wpaper:517&r=upt
  14. By: Nicolas Gravel (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Michel Poitevin (CIREQ - Centre interuniversitaire de recherche en économie quantitative - Université de Montréal, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal)
    Abstract: This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a welfarist social planner when households with identical utility functions for non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in households contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific case where households have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case. "C'est pour unir les avantages divers qui résultent de la grandeur et de la petitesse des nations que le fédératif a été créé." (Alexis de Toqueville)
    Keywords: federalism; jurisdictions; asymmetric information; equalization; city mergers
    Date: 2014–09
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01063191&r=upt
  15. By: Kazuo Nishimura (RIEB, Kobe University - Kobe University, KIER, Kyoto University - Kyoto University); Carine Nourry (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Venditti (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality affecting utility which is financed by income tax and public debt. We show that public debt considered as a fixed portion of GDP can have a stabilizing or destabilizing effect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic fluctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent fluctuations without debt.
    Keywords: endogenous cycles; heterogeneous agents; public spending; public debt; borrowing constraint
    Date: 2014–06
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01059567&r=upt
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