|
on Utility Models and Prospect Theory |
| By: | Elena Antoniadou; Leonard J. Mirman; Marc Santugini |
| Abstract: | We study the effect of changing income on optimal decisions in the multidimensional expected utility framework with strongly separable preferences. Using the Kihlstrom and Mirman (1974) (KM) utility representation, we show that the effect of changing income can be decomposed into a modified income effect linked to the classical income effect and an effect representing attitudes to risk, modified by income. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:1601&r=upt |
| By: | Caroline J. Charpentier; Jan-Emmanuel De Neve; Jonathan P. Roiser; Tali Sharot |
| Abstract: | Intuitively, how we feel about potential outcomes will determine our decisions. Indeed, one of the most influential theories in psychology, Prospect Theory, implicitly assumes that feelings govern choice. Surprisingly, however, we know very little about the rules by which feelings are transformed into decisions. Here, we characterize a computational model that uses feelings to predict choice. We reveal that this model predicts choice better than existing value-based models, showing a unique contribution of feelings to decisions, over and above value. Similar to Prospect Theory value function, feelings showed diminished sensitivity to outcomes as value increased. However, loss aversion in choice was explained by an asymmetry in how feelings about losses and gains were weighed when making a decision, not by an asymmetry in the feelings themselves. The results provide new insights into how feelings are utilized to reach a decision. |
| Keywords: | Decision-making, feelings, subjective well-being, value, utility, Prospect Theory |
| JEL: | D01 D03 D81 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1408&r=upt |
| By: | Mengel F.; Peeters R.J.A.P. (GSBE) |
| Abstract: | Excessive risk taking in markets can have devastating consequences as recent financial crises have high-lighted. In this paper we ask whether markets as an institution encourage such excessive risk taking. To establish causality, we isolate the effects of market interaction in a laboratory experiment keeping otherpossibly confounding factors constant. We find that the opposite is true. Markets decrease participants willingness to take risks. This finding can be explained by social comparison utility in the presence of negatively correlated risks and we provide evidence for such a mechanism. |
| Keywords: | Institutions: Design, Formation, and Operations; Behavioral Economics: Underlying Principles; |
| JEL: | D02 D03 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2015042&r=upt |
| By: | Armin Falk (Universität Bonn); Anke Becker (Bonn Graduate School of Economics); Thomas Dohmen (Universität Bonn); Benjamin Enke (University of Bonn); David Huffman (University of Pittsburgh); Uwe Sunde (University of Munich) |
| Abstract: | This paper presents the Global Preference Survey, a globally representative dataset on risk and time preferences, positive and negative reciprocity, altruism, and trust. We collected these preference data as well as a rich set of covariates for 80,000 individuals, drawn as representative samples from 76 countries around the world, representing 90 percent of both the world’s population and global income. The global distribution of preferences exhibits substantial variation across countries, which is partly systematic: certain preferences appear in combination, and follow distinct economic, institutional, and geographic patterns. The heterogeneity in preferences across individuals is even more pronounced and varies systematically with age, gender, and cognitive ability. Around the world, our preference measures are predictive of a wide range of individual-level behaviors including savings and schooling decisions, labor market and health choices, prosocial behaviors, and family structure. We also shed light on the cultural origins of preference variation around the globe using data on language structure. |
| Keywords: | economic preferences, cultural variations |
| JEL: | D01 D03 F00 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2016-004&r=upt |
| By: | Raouf Boucekkine (Aix-Marseille Université (AMSE), CNRS and EHESS; Senior member, Institut Universitaire de France); Hélène Latzer (CEREC, Université Saint-Louis (Belgium)); Mathieu Parenti (ECARES, Université Libre de Bruxelles (Belgium) and CEPR (United Kingdom)) |
| Abstract: | This paper introduces variable mark-ups in a horizontal-differentiation growth model by considering a larger class of preferences that nests the classic “CES” specification usually present in the workhorse love-for-variety models. Our first result is to obtain a generalized characterization of the Euler condition for this broader class of utility functions: in our model, the Euler rule features a supplementary term aiming at compensating the consumer for variations in the preference for variety along the consumption level. We are then also able to demonstrate that in our generalized framework, the economy’s balanced growth path displays both endogenous markups and a strictly positive growth rate of the number of available varieties (being the engine of growth). Finally, we show that under endogenous markups, the economy’s growth rate and firms’ market power can display a negative correlation, as opposed to the standard result obtained in the CES framework. |
| Keywords: | endogenous growth, variable markups, indirectly additive preferences |
| JEL: | D4 L1 O3 O4 |
| Date: | 2016–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1608&r=upt |
| By: | Romain Blanchard; Laurence Carassus; Mikl\'os R\'asonyi |
| Abstract: | We consider non-concave and non-smooth random utility functions with do- main of definition equal to the non-negative half-line. We use a dynamic pro- gramming framework together with measurable selection arguments to establish both the no-arbitrage condition characterization and the existence of an optimal portfolio in a (generically incomplete) discrete-time financial market model with finite time horizon. In contrast to the existing literature, we propose to consider a probability space which is not necessarily complete. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.06685&r=upt |
| By: | Majid M. Al-Sadoon |
| Abstract: | This paper considers linear rational expectations models from the linear systems point of view. Using a generalization of the Wiener-Hopf factorization, the linear systems approach is able to furnish very simple conditions for existence and uniqueness of both particular and generic linear rational expectations models. As applications of this approach, the paper provides results for existence of sequential solutions to block triangular systems and provides an exhaustive description of stationary and unit root solutions, including a generalization of Granger's representation theorem. In addition, the paper provides an innovative numerical solution to the Wiener-Hopf factorization and its generalization. |
| Keywords: | Rational expectations, linear systems, Wiener-Hopf factorization, vector autoregressive processes, block triangular system, stability, cointegration. |
| JEL: | C32 C51 C62 C63 C65 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1511&r=upt |
| By: | Kengo Nutahara; Kazuki Hiraga |
| Abstract: | This paper characterizes the shape of the Laffer curve for consumption tax. It is shown that the Laffer curve for consumption tax can be hump-shaped if the utility function is additively separable in consumption and labor supply. Conversely, it cannot be hump-shaped if the utility function is non-separable as reported by previous researchers. It is also shown that the difference in the utility functions has quantitatively significant effects on the peak tax rates of the Laffer curves for labor and capital income taxes. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:16-002e&r=upt |
| By: | Ngo Van Long |
| Abstract: | This paper reviews the literature concerning the impacts of other-regarding preferences and ethical choice on environmental outcomes when agents behave strategically. We consider two types of other-regarding preferences: (i) envy or status concern, (ii) altruism and inequality aversion. We contrast the preference-based approach with the ethical approach in which some choices are made on ethical ground and thus are not necessarily utility-maximizing. Models exhibiting other-regarding preferences do not yield unambiguous results concerning the effects of strategic behavior on the environment. In contrast, models in which choices are motivated by Kantian ethics display more robust results. Cet article offre un survol de la littérature sur les effets environnementaux des choix motivés par des considérations éthiques et des préférences qui portent sur les autres. On considère les préférences influencées par i) l’envie ou par ii) l’altruisme et l’aversion de l’inégalité. On compare l’approche basée sur ces préférences et l’approche basée sur l’éthique. Les modèles inspirés de la première approche ne donnent pas des résultats robustes. Par contre, les modèles basés sur la dernière approche sont beaucoup plus robustes. |
| Keywords: | Corporate governance; environment; Kantian equilibrium, Gouvernance d’entreprise; environnement; équilibre kantien |
| JEL: | Q31 Q42 |
| Date: | 2016–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2016s-10&r=upt |
| By: | Dasgupta, Utteeyo (Wagner College); Mani, Subha (Fordham University); Sharma, Smriti (UNU-WIDER); Singhal, Saurabh (UNU-WIDER) |
| Abstract: | Field constraints often necessitate choosing an elicitation task that is intuitive, easy to explain, and simple to implement. Given that subject behavior often differs dramatically across tasks when eliciting risk preferences, caution needs to be exercised in choosing one risk elicitation task over another in the face of field constraints. We compare behavior in the simple most investment game (Gneezy and Potters 1997) and the ordered lottery choice game (Eckel and Grossman 2002) to evaluate whether the simpler task allows us to elicit attitudes consistent with those elicited from the ordered lottery task. Using a sample of over 2000 Indian undergraduate students, we find risk attitudes to be fairly stable across the two tasks. Our results further indicate that the consistency of risk attitudes across the tasks depends on gender of the subject, quantitative skills, father's education level, and dispositional factors such as locus of control and Big Five personality traits. |
| Keywords: | risk preferences, experiment design, elicitation methods, personality traits, India |
| JEL: | C91 C81 D81 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9765&r=upt |
| By: | Araar,Abdelkrim; Verme,Paolo |
| Abstract: | What is the welfare effect of a price change? This simple question is one of the most relevant and controversial questions in microeconomic theory and its different answers can lead to severe heterogeneity in empirical results. This paper returns to this question with the objective of providing a general framework for the use of theoretical contributions in empirical works, with a particular focus on poor people and poor countries. Welfare measures (such as Equivalent Variation or Consumer's Surplus) and computational methods (such as Taylor's approximations or the Vartia method) are compared to test how these choices result in different welfare measurement under different price shock scenarios. As a rule of thumb and irrespective of parameter choices, welfare measures converge to approximately the same result for price changes below 10 percent. Above this threshold, these measures start to diverge significantly. Budget shares play an important role in explaining such divergence, whereas the choice of demand system has a minor role. Under standard utility assumptions, the Laspeyers and Paasche variations are always the outer bounds of welfare estimates and consumer surplus is always the median estimate. The paper also introduces a new simple welfare approximation, clarifies the relation between Taylor's approximations and the income and substitution effects, and provides an example for treating nonlinear pricing. Stata codes for all computations are provided in annex. |
| Keywords: | E-Business,Access to Markets,Economic Theory&Research,Emerging Markets,Markets and Market Access |
| Date: | 2016–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7566&r=upt |
| By: | Dan Usher (Queen's University) |
| Abstract: | A utilitarian measure of economic growth combines changes in the distribution of income with changes in real income per person to show how much better off people are becoming over time. It is the rate of growth of the dollar value of average utility of income. As such , it is seen differently by people with different utility of income functions. A growth rate in U.S. household income of 0.63% per year as ordinarily measured disappears altogether - is transformed into a decline of 0.086% per year - when the utility of income function is sufficiently concave. Strengths, weaknesses and implicit assumptions of the utilitarian measure are discussed. |
| Keywords: | National Income, Utilitarian, Certainty-equivalence |
| JEL: | E31 E32 O40 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1356&r=upt |
| By: | Jin Hyuk Choi |
| Abstract: | We consider an optimal investment/consumption problem to maximize expected utility from consumption. In this market model, the investor is allowed to choose a portfolio which consists of one bond, one liquid risky asset and one illiquid risky asset (proportional transaction costs). Using the shadow price approach, we fully characterize the optimal trading and consumption strategies in terms of the solution of a free boundary ODE with an integral constraint. In the analysis, there is no technical assumption (except a natural one) on the model parameters. We also prove an asymptotic expansion result for small transaction costs. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.06998&r=upt |
| By: | Ammann, Manuel; Coqueret, Guillaume; Schade, Jan-Philip |
| Abstract: | We show that the introduction of a leverage constraint improves the practical implementation of characteristics-based portfolios. The addition of the constraint leads to significantly lower transaction costs, to a reduction of negative portfolio weights, and to a decrease in volatility and misspecification risk. Furthermore, it allows investors to implement any desired level of leverage. In this study, we include 12 characteristics, thereby extending the classical size, book-to-market and momentum paradigm. We report several key indicators such as the proportion of negative weights, Sharpe ratio, volatility, transaction costs, the transaction cost-adjusted certainty equivalent returns, and the Herfindahl-Hirschman index. Analyzing the sensitivity of these key indicators to the choice of multiple combinations of the 12 characteristics, to risk aversion, and to estimation sample size, we show that constrained policies are much less sensitive to these parameters than their unconstrained counterparts. Finally, for quadratic utility, we derive a semi-closed analytical form for the portfolio weights. Overall, we provide a comprehensive extension of characteristics-based portfolio choice and contribute to a better understanding and implementation of the allocation process. |
| Keywords: | Portfolio choice, leverage constraint, characteristics-based investing |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2016:06&r=upt |
| By: | Salar Jahedi (RAND Corporation); Cary Deck (University of Arkansas, University of Alaska-Anchorage, Chapman University); Dan Ariely (Duke University) |
| Abstract: | Previous experiments have found that subjecting participants to cognitive load leads to poorer decision making, consistent with dual-system models of behavior. Rather than taxing the cognitive system, this paper reports the results of an experiment that takes a complementary approach: arousing the emotional system. The results indicate that exposure to arousing visual stimuli as compared to neutral images has a negligible impact on performance in arithmetic tasks, impatience, risk taking in the domain of losses, and snack choice although we nd that arousal modestly increases in risk-taking in the gains domain and increases susceptibility to anchoring e ects. We nd the ef- fect of arousal on decision making to be smaller and less consistent then the e ect of increased cognitive load for the same tasks. |
| Keywords: | Dual System, Sexual Arousal, Impatience, Risk Taking, Behavioral Economics |
| JEL: | C91 D03 D81 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:16-02&r=upt |
| By: | Nathalie Berta (REGARDS - Laboratoire d'Economie et Gestion de Reims - URCA - Université de Reims Champagne-Ardenne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Despite its increasing role in economic theory, the concept of externality seems to elude any attempt at rigorous and consensual definition. While problems of definition have emerged with the concept itself in the 1950s, the paper focuses on the definition of externality within the general equilibrium theory. In the Arrow-Debreu framevork, externality is a kind of “missing market” (Arrow 1969) – an unpriced effect that upsets the assumption of the complete system of markets – and its formalization is achieved by introducing a direct interdependence between utility or production functions. The paper shows that this Arrovian definition allows some ambiguities to persist. As witnessed by some authors' positions in the 1970s (Mishan 1971, Baumol and Oates 1975, Heller and Starrett 1976, Laffont 1988), it does not highlight two features associated with the traditional meaning of externalities: whether or not it is an exogenous effect and an unintended effect. This raises, although differently, the issue of the dilution of externality within the larger notion of individual interdependences. Beyond the conceptual importance of clarifying the definition of externality, this issue has also a strong normative content: giving a strict definition of externality amounts, implicitly, to drawing the frontier of legitimate internalisation and economic policy. |
| Keywords: | externality,K. Arrow,missing market,market failure,utility interdependences |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01277990&r=upt |
| By: | Abate , Megersa (VTI); Vierth , Inge (VTI); Karlsson , Rune (VTI); de Jong , Gerard (Significance); Baak , Jaap (Significance) |
| Abstract: | As part of the further development of the Swedish national freight model system (SAMGODS), we developed a stochastic logistics model in the form of a disaggregate random utility-based model of transport chain and shipment size choice, estimated on the Swedish Commodity Flow Survey (CFS) 2004-2005. Moving from the current deterministic logistics model within the SAMGODS model to a stochastic one, is important because it bases the model on a stronger empirical foundation. The deterministic model was not estimated on observed choice outcomes, but just postulates that the least cost solution will be chosen. We estimated logit models which explain the joint choice of shipment size (in discrete categories) and transport chain separately for sixteen different commodity types. A transport chain (e.g. truck-vessel-truck) is a sequence of modes used to transport a shipment between the locations of production and consumption. Transport cost, travel time and value density are some of the main determinants included in the models. It is important to note that by their very nature these probabilistic models account for the influence of omitted factors. A deterministic model effectively assumes that the stochastic component can be ignored – in other words, that the researcher has full knowledge of all the drivers of behaviour and that there is no randomness in actual behaviour. As a result of adding the stochastic component in the random utility model, the response functions (now expressed in the form of probabilities) become smooth instead of lumped at 0 and 1 as in a deterministic model. This in turn will address the problem of “overshooting” that is prevalent in a deterministic model when testing different scenarios or policies. For two of the commodity types (metal products and chemical products) for which we estimated a transport chain and shipment size choice model, we also implemented the model in the SAMGODS framework. The implementation takes place at the level of the annual firm-to-firm flows by commodity type between producing and consuming firms that are generated by the first steps of the SAMGODS model (PC flows between zones that have been allocated to individual firms at both ends). For every firm-to-firm flow, shipment size and transport chain choice probabilities are calculated and added over the firm-to-firm flows of the PC relation (sample enumeration, as used in several disaggregate transport models). From this, the aggregate OD matrices by mode can be derived straightforwardly, as well as results in terms of tonne-kilometres by mode. It was not possible to empirically model transshipment location choices, because they are not stated in the CFS. Therefore, the determination of the optimal transshipment points for each available chain type from the set of available locations is still done deterministically. The implemented models were applied to produce elasticities of demand expressed in tonne-kilometres for various changes in cost and time for road, rail and sea transport. These elasticities are compared to those for the same commodity types in the deterministic model and to the available literature. The elasticities clearly differ between the two models, they are usually smaller (in absolute values) in the stochastic model, as expected. In the paper, we report the basic differences between a stochastic and a deterministic logistics model, the estimation results for the sixteen commodities, the way the stochastic model was implemented within the SAMGODS model, the elasticities that we obtained for the implemented stochastic model and the comparison with elasticities from the deterministic model and the literature. |
| Keywords: | Freight; Choice model; SAMGODS |
| JEL: | R40 |
| Date: | 2016–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2016_001&r=upt |
| By: | Meinhardt, Holger Ingmar |
| Abstract: | Nguyen and Thomas (2016) claimed that they have found a method to compute the nucleoli of games with more than 50 players using nested linear programs (LP). Unfortunately, this claim is false. They incorrectly applied the indirect proof by ``A and not B implies A and not A'' to conclude that ``if A then B''is valid. In fact, they prove that a truth implies a falsehood. As established by Meinhardt (2015a), this is a wrong statement. Therefore, instead of giving a proof of their main Theorem 4b, they give a disproof. It comes as no surprise to us that the flow game example presented by these authors to support their arguments is obviously a counter-example of their algorithm. We show that the computed solution by this algorithm is neither the nucleolus nor a core element of the flow game. Moreover, the stopping criterion of all proposed methods is wrong, since it does not satisfy one of Kohlberg's properties (cf. Kohlberg (1971)). As a consequence, none of these algorithms is robust. |
| Keywords: | Transferable Utility Game, Nucleolus, Flow Problem, Propositional Logic; Circular Reasoning (circulus in probando); Indirect Proof; Proof by Contradiction; Proof by Contraposition. |
| JEL: | C71 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69789&r=upt |