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on Utility Models and Prospect Theory |
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Issue of 2019‒05‒06
eighteen papers chosen by |
| By: | Bradley, Richard; Stefansson, H. Orii |
| Abstract: | According to the orthodox treatment of risk preferences in decision theory, they are to be explained in terms of the agent's desires about concrete outcomes. The orthodoxy has been criticized both for conflating two types of attitudes and for committing agents to attitudes that do not seem rationally required. To avoid these problems, it has been suggested that an agent's attitudes to risk should be captured by a risk function that is independent of her utility and probability functions. The main problem with that approach is that it suggests that attitudes to risk are wholly distinct from people's (non-instrumental) desires. To overcome this problem, we develop a framework where an agent's utility function is defined over chance propositions (that is, propositions describing objective probability distributions) as well as ordinary (non-chance) ones, and argue that one should explain different risk attitudes in terms of different forms of the utility function over such propositions. 1 Introduction 2 Risk Attitudes in the von Neumann-Morgenstern Framework 2.1 Conceptual challenges 2.2 Empirical challenges 3 Risk-Weighted Expected Utility Theory 3.1 Risk-weighted expected utility versus expected utility 3.2 Problems with risk-weighted expected utility theory 4 Risk Attitudes in the Jeffrey Framework 4.1 Linearity, chance neutrality, and risk aversion 4.2 Distinguishing risk attitudes 4.3 Ambiguity and the four-fold patter 5 Conclusion. |
| JEL: | N0 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:81364&r=all |
| By: | Kniesner, Thomas J. (Claremont Graduate University) |
| Abstract: | There are many possible connections between VSL and behavioral economics. A list of topics includes endowment effects, risk salience, ambiguity aversion, present bias, reference groups, reference points, and experienced versus decision utilities. There are also nudges that connect to estimating or using VSL in government decisions and cousins of behavioral economic research including interpersonal heterogeneity, experiments, neuroeconomics, and beauty or personal attractiveness. Current evidence suggests that VSL and behavioral economics best connect via (1) possible multi-attribute reference group effects and (2) a possible distinction between decision utility and experienced utility. |
| Keywords: | VSL, behavioral economics, WTP, WTA, reference dependence, benefit-cost analysis, nudge, internality |
| JEL: | D61 D91 J17 J31 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12280&r=all |
| By: | Ellis, Andrew |
| Abstract: | This paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information. An optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation, net of a cognitive cost of attention. The main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention. Observing these choices permits unique identification of the agent’s utility index, the information to which she pays attention, her attention cost and her prior whenever information is costly. |
| Keywords: | inattention; optimal inattention; conditional choice |
| JEL: | J1 |
| Date: | 2017–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:85334&r=all |
| By: | Kazuki Hiraga; Kengo Nutahara |
| Abstract: | This study shows that the shape of the tax revenue curve for consumption tax and its boundedness are sensitive to (i) the functional form of utility and (ii) the use of tax revenue in a neoclassical general equilibrium model. The tax revenue curve for consumption tax cannot be hump-shaped if the utility function is King- Plosser-Rebelo utility with constant labor supply elasticity. Conversely, the curve can be hump-shaped if the utility function is additively separable in consumption and labor supply or if the utility function is Greenwood-Hercowitz-Huffman, both of which are popular in the literature. The use of tax revenue also has significant effects on the tax revenue curve for consumption tax. If the tax revenue is mainly used as a lump-sum transfer to households, Then the tax revenue is likely to be unbounded, whereas it is likely to be bounded and the tax revenue curve is likely to be hump-shaped if the tax revenue is mainly used as government consumption. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:19-003e&r=all |
| By: | Christoph Huber; Julia Rose |
| Abstract: | In real world financial markets, dividend processes as well as fundamental values are governed by imprecision; neither the objective probabilities of returns nor the actual amounts of possible returns are known for certain. With a novel experimental approach, we analyze the impact of risk, imprecision in probabilities (ambiguity), imprecision in outcomes, and a combination of the latter two in an individual decision task and in a market environment. In contrast to the previous literature, we do not find any significant imprecision premia for imprecise probabilities. However, we do find significant and persistent imprecision-in-outcomes seeking in the individual task as well as the market setting. Looking deeper into the combination of individual attitudes and market behavior, we find that these patterns survive despite a high level of heterogeneity in individual's beliefs about outcomes. |
| Keywords: | ambiguity aversion, imprecision, uncertainty, asset markets, experimental finance |
| JEL: | G11 G12 C92 D81 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2019-06&r=all |
| By: | Cobb-Clark, Deborah A. (University of Sydney); Dahmann, Sarah C. (University of Sydney); Kettlewell, Nathan (University of Sydney) |
| Abstract: | Depression affects the way that people process information and make decisions, including those involving risk and uncertainty. Our objective is to analyze the way that depressive episodes shape risk preferences and risk-taking behaviors. We are the first to address this issue using large-scale, representative panel data that include both behavioral and stated risk preference measures and a theoretical framework that accounts for the multiple pathways through which depression affects risk-taking. We find no disparity in the behavioral risk preferences of the mentally well vs. depressed; yet depression is related to people's stated risk preferences and risk-taking behaviors in ways that are context-specific. Those who are likely to be experiencing a depressive episode report less willingness to take risks in general, but more willingness to take health risks, for example. We investigate these patterns by developing a conceptual model – informed by the psychological literature – that links depression to risk-taking behavior through the key elements of a standard intertemporal choice problem (e.g., time preferences, expectations, budget constraints). This motivates a mediation analysis in which we show that differences in risk-taking behavior are largely explained by depression-related disparities in behavioral traits such as locus of control, optimism and trust. Overall, we find that there is no overarching tendency for those who are depressive to engage in either more or less risk-taking. Instead, the decision-making context matters in ways that largely align with our theoretical expectations. |
| Keywords: | risk preferences, depression, mental health, risk-taking |
| JEL: | D91 I12 D14 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12285&r=all |
| By: | Seiji Takanashi; Takehiro Kawasaki; Taiki Todo; Makoto Yokoo |
| Abstract: | In this paper, we study efficiency in truthful auctions via a social network, where a seller can only spread the information of an auction to the buyers through the buyers' network. In single-item auctions, we show that no mechanism is strategy-proof, individually rational, efficient, and weakly budget balanced. In addition, we propose $\alpha$-APG mechanisms, a class of mechanisms which operate a trade-off between efficiency and weakly budget balancedness. In multi-item auctions, there already exists a strategy-proof mechanism when all buyers need only one item. However, we indicate a counter-example to strategy-proofness in this mechanism, and to the best of our knowledge, the question of finding a strategy-proof mechanism remains open. We assume that all buyers have decreasing marginal utility and propose a generalized APG mechanism that is strategy-proof and individually rational but not efficient. Importantly, we show that this mechanism achieves the largest efficiency measure among all strategy-proof mechanisms. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1904.12422&r=all |
| By: | Ondřej Krčál (Masaryk University); Rostislav Staněk (Masaryk University); Martin Slanicay (Masaryk University) |
| Abstract: | A large body of evidence supports a negative association between risk aversion of workers and the level of risk they face in their occupations. This relationship could be explained by the self-selection of workers into jobs according to their risk preferences or by the effect on risk attitudes of occupations in which people face or witness dangerous situations. We use incentivized experiments to measure risk preferences among three different groups: experienced firefighters, novice firefighters, and students. We find that experienced firefighters are less risk-averse than novice firefighters, and these in turn are less risk-averse than students. The effects remain significant even after controlling for other relevant differences between these groups. Our findings suggest that the observed relationship between risk aversion and high-risk occupations is not only a result of self-selection but also of people’s preferences being shaped by their work lives. |
| Keywords: | risk preferences, high-risk occupations, self-selection, lab-in-the-field experiment |
| Date: | 2019–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:mub:wpaper:2019-05&r=all |
| By: | Kukushkin, Nikolai |
| Abstract: | Strategic games are considered where each player's total utility is an aggregate of local utilities obtained from the use of certain "facilities." All players using a facility obtain the same utility therefrom, which may depend on the identities of users and on their behavior. Individual improvements in such a game are acyclic if a "trimness" condition is satisfied by every facility and all aggregation rules are consistent with a separable ordering. Those conditions are satisfied, for instance, by bottleneck congestion games with an infinite set of facilities. Under appropriate additional assumptions, the existence of a Nash equilibrium is established. |
| Keywords: | Bottleneck congestion game; Game with structured utilities; Potential game; Aggregation; Separable ordering |
| JEL: | C72 |
| Date: | 2019–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93588&r=all |
| By: | Simone Farinelli; Hideyuki Takada |
| Abstract: | We apply Geometric Arbitrage Theory to obtain results in Mathematical Finance, which do not need stochastic differential geometry in their formulation. First, for a generic market dynamics given by a multidimensional It\^o's process we specify and prove the equivalence between (NFLVR) and expected utility maximization. As a by-product we provide a geometric characterization of the (NUPBR) condition given by the zero curvature (ZC) condition. Finally, we extend the Black-Scholes PDE to markets allowing arbitrage. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1904.11565&r=all |
| By: | Hebert, Benjamin (Stanford University); Woodford, Michael (Columbia University) |
| Abstract: | We propose a new approach to modeling the cost of information structures in rational inattention problems: the “neighborhood-based†cost functions. These cost functions have two properties that we view as desirable: they summarize the results of a sequential evidence accumulation problem, and they capture notions of “perceptual distance.†The first of these properties is connected to an extensive literature in psychology and neuroscience, and the second ensures that neighborhood-based cost functions, unlike mutual information, make accurate predictions about behavior in perceptual experiments. We compare the implications of our neighborhood-based cost functions with those of the mutual information in a series of applications: security design, global games, modeling perceptual judgments, and linear-quadratic-Gaussian settings. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3751&r=all |
| By: | Demuynck, Thomas (ECARES, Université Libre de Bruxelles); Hjertstrand, Per (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Since Paul Samuelson introduced the theory of revealed preference, it has become one of the most important concepts in economics. This chapter surveys some recent contributions in the revealed preference literature. We depart from Afriat's theorem, which provides the conditions for a data set to be consistent with the utility maximization hypothesis. We provide and motivate a new condition, which we call the Varian inequalities. The advantage of the Varian inequalities is that they can be formulated as a set of mixed integer linear inequalities, which are linear in the quantity and price data. We show how the Varian inequalities can be used to derive revealed preference tests for weak separability, and show how it can be used to formulate tests of the collective household model. Finally, we discuss measurement errors in the observed data and measures of goodness-of-fit, power and predictive success. |
| Keywords: | Afriats theorem; Collective household model; GARP; Mixed integer linear programing; Revealed preference; Varian inequalities; Weak separability |
| JEL: | C60 C63 D01 D11 |
| Date: | 2019–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1274&r=all |
| By: | Thomas Aronsson (Umea University, Sweden); Olof Johansson-Stenman (University of Gothenburg, Sweden); Ronald Wendner (University of Graz, Austria) |
| Abstract: | This paper deals with tax policy responses to charitable giving, defined in terms of voluntary contributions to a public good, to which the government also contributes through public revenue; the set of tax instruments contains general, nonlinear taxes on income and charitable giving. In addition to consumption, leisure and a public good, individuals obtain utility from the warm glow of giving and social status generated by their relative contributions to charity as well as their relative consumption compared with others. We analyze the conditions under which it is optimal to tax or subsidize charitable giving and derive corresponding optimal policy rules. Another aim of the paper is to compare the optimal tax policy and public good provision by a conventional welfarist government with those by two kinds of paternalist governments: The first kind does not respect the consumer preferences for status in terms of relative giving and relative consumption, while the second kind in addition does not respect preferences for warm glow of giving. The optimal policy rules for marginal taxation and public good provision are similar across governments, except for the stronger incentive to tax charitable giving at the margin under the more extensive kind of paternalism. Numerical simulations supplement the theoretical results. |
| Keywords: | Conspicuous consumption; Conspicuous charitable giving; Optimal taxation; Warm glow |
| JEL: | D03 D62 H21 H23 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2019-04&r=all |
| By: | Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald |
| Abstract: | This paper deals with tax policy responses to charitable giving, defined in terms of voluntary contributions to a public good, to which the government also contributes through public revenue; the set of tax instruments contains general, nonlinear taxes on income and charitable giving. In addition to consumption, leisure and a public good, individuals obtain utility from the warm glow of giving and social status generated by their relative contributions to charity as well as their relative consumption compared with others. We analyze the conditions under which it is optimal to tax or subsidize charitable giving and derive corresponding optimal policy rules. Another aim of the paper is to compare the optimal tax policy and public good provision by a conventional welfarist government with those by two kinds of paternalist governments: The first kind does not respect the consumer preferences for status in terms of relative giving and relative consumption, while the second kind in addition does not respect preferences for warm glow of giving. The optimal policy rules for marginal taxation and public good provision are similar across governments, except for the stronger incentive to tax charitable giving at the margin under the more extensive kind of paternalism. Numerical simulations supplement the theoretical results. |
| Keywords: | Conspicuous consumption, conspicuous charitable giving, optimal taxation, warm glow. |
| JEL: | D03 D62 H21 H23 |
| Date: | 2019–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93414&r=all |
| By: | Matthias Fahn; Regina Seibel |
| Abstract: | We study optimal employment contracts for present-biased employees who can conduct on-the-job search. Presuming that firms cannot offer long-term contracts, we find that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, they search more, which partially counteracts the inefficiencies caused by their present bias. |
| Keywords: | present bias, on-the-job search |
| JEL: | D21 D83 D90 J31 J32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7604&r=all |
| By: | Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Monge-Naranjo, Alexander (Federal Reserve Bank of St. Louis) |
| Abstract: | We develop a tractable dynamic Roy model in which workers choose occupations to maximize their lifetime utility. In our setting, a worker’s human capital is driven by his labor market choices, given idiosyncratic occupation-specific productivity shocks and the costs of switching occupations. We characterize the equilibrium assignment of workers to jobs and show that the resulting evolution of aggregate human capital across occupations ultimately determines the long-run rate of growth of the economy. We then use our model to quantitatively study the impact of labor-saving technical changes on workers’ occupational choices and on the economy’s income inequality, job polarization and long-run growth. |
| Keywords: | Occupational Choice; Human Capital; Dynamics; Inequality; Endogenous Growth; General Equilibrium |
| JEL: | E24 J24 J31 J62 |
| Date: | 2019–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2019-013&r=all |
| By: | Hakimov, Rustamdjan (WZB Berlin); Kübler, Dorothea (WZB Berlin) |
| Abstract: | The paper surveys the experimental literature on matching markets. It covers house allocation, school choice, and two-sided matching markets such as college admissions. The main focus of the survey is on truth-telling and strategic manipulations by the agents, on the stability and efficiency of the matching outcome, as well as on the distribution of utility. |
| Keywords: | experiments; matching markets; survey; |
| JEL: | C92 D83 |
| Date: | 2019–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:153&r=all |
| By: | Raza, Syed Ali; Shah, Nida; Nisar, Wasay |
| Abstract: | In the recent era, environmental protection has gained popularity and a paradigm shift has been observed in the consumer’s dietary choices. The consumer start preferring organic foods, as they are considered as healthier and eco-friendly. The organic food consumption is widely increased in the developed countries but its adoption is still low in the developing country like Pakistan. Therefore, the purpose of this study is to examine the factors that affect the adolescent’s intention to purchase organic foods in the context of Pakistan. For the purpose of the study, the data have been collected from 350 respondents and Partial Least Square Structural Equation Modeling (PLS-SEM) has been used for the analysis. The result shows that the variables ecological welfare, nutritional content, sensory appeal has a significant relationship with utilitarian and hedonic attitude. Whereas, natural content has a significant relationship with utilitarian attitude but has an insignificant relationship with hedonic attitude. On the contrary, price has a significant relationship with hedonic attitude but has an insignificant relationship with utilitarian attitude. Moreover, both the attitude (utilitarian and hedonic) has a significant relationship with consumer intention to buy organic foods. From the results, several implications can be derived for the marketers, policymakers, and the organic food retailers. |
| Keywords: | Organic Food Consumption, Utilitarian and Hedonic Attitude, Pakistan. PLS-SEM |
| JEL: | I12 |
| Date: | 2019–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93570&r=all |