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on Utility Models and Prospect Theory |
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Issue of 2023‒06‒12
fifteen papers chosen by |
| By: | Yuhki Hosoya |
| Abstract: | In this paper, we consider an environment in which the utilitarian theorem for the NM utility function derived by Harsanyi and the utilitarian theorem for Alt's utility function derived by Harvey hold simultaneously, and prove that the NM utility function coincides with Alt's utility function under this setup. This result is so paradoxical that we must presume that at least one of the utilitarian theorems contains a strong assumption. We examine the assumptions one by one and conclude that one of Harsanyi's axioms is strong. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.09973&r=upt |
| By: | Paolo Figini; Veronica Leoni; Laura Vici |
| Abstract: | The utility associated with a service’s consumption is contingent on its intrinsic characteristics and various situational factors. One key element that influences consumer satisfaction is adherence to prior expectations. This is particularly relevant for experience goods that highly depend on external factors, such as weather. On these premises, the current study explores the role of expectations on utility by analyzing the effect of weather surprises (i.e., the mismatch between forecast and realized weather) on online ratings. Results from the analysis of over 300, 000 reviews posted on Booking.com indicate that weather surprises have an impact on the reported experienced utility, the effect depending on the sign of the surprise. Moreover, the consumption span moderates the surprise effect, thereby mitigating the impact of both positive and negative surprises on utility. |
| JEL: | D83 D91 L81 Q54 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1185&r=upt |
| By: | van der Mensbrugghe, Dominique |
| Abstract: | Latin Hypercube Sampling (LHS) is one method of Monte Carlo-type sampling, which is useful for limiting sample size yet maximizing the range of sampling of the underlying distributions. The LHS utility, for which this document describes the usage, also allows for user-specified correlations between two or more of the sampled distributions. The LHS utility described herein is a full re-coding using C/C++ of the original LHS utility—developed at Sandia National Labs (Swiler and Wyss (2004)), written in FORTRAN and freely available. The re-coding hones close to the original FORTRAN code, but allows for significantly more flexibility. For example, dynamic memory allocation is used for all internal variables and hence there are no pre-determined dimensions. The new utility has additional features compared to the original FORTRAN code: (1) it includes 10 new statistical distributions; (2) it has four additional output formats; and (3) it has an alternative random number generator. This guide provides a summary of the full features of the LHS utility. For a complete reference, with the exception of the new features, as well as a description of the intuition behind the LHS algorithm users are referred to Swiler and Wyss (2004). |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:gta:workpp:7035&r=upt |
| By: | Marandici, Ion |
| Abstract: | Why did Russia’s authoritarian leader decide to annex Crimea? Why was Ukraine unable to resist the Russian aggression? This study relies on prospect theory to illuminate the decision-making in Moscow and Kyiv that led to the takeover of Crimea. First, I identify the turning points of the Euromaidan crisis preceding the annexation and trace how Putin’s assessment of the status quo shifted repeatedly between the domains of losses and gains. In the domain of losses, the Russian leader, influenced by a neo-imperial faction within the Presidential Administration, became more risk acceptant, annexed the peninsula, and escalated the hybrid warfare. Putin framed the intervention using nationalist themes, drawing on salient historical analogies from the past. Second, new documentary evidence such as the minutes of Ukraine’s National Defence and Security Council (NDSC) and participant testimonies reveals that the decision-makers in Kyiv could not mount an effective defence due to squabbles among coalition partners, the breakdown of the military chain of command in Crimea, the looming threat of a full-scale invasion from the East, and the inflated expectations regarding the West’s capacity to deter Russia’s aggression. Third, the article relies on prospect theory to explain why after Crimea’s annexation, Putin refrained from continuing the territorial expansion deeper into Ukraine, opting instead to back secessionism in Donbas. This account highlights the explanatory power of prospect theory compared to alternative frameworks, pointing out, at the same time, the need to incorporate causal mechanisms from competing theoretical traditions in studies of foreign policy decision-making. |
| Keywords: | Russia; Crimea annexation; Ukraine; hybrid warfare; prospect theory; groupthink; foreign policy analysis; decision-making under risk |
| JEL: | B4 B40 D72 D74 D81 |
| Date: | 2022–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117208&r=upt |
| By: | Conti, G.; Giustinelli, P. |
| Abstract: | We provide a framework to disentangle the role of preferences and beliefs in health behavior, and we apply it to compliance behavior during the acute phase of the COVID-19 pandemic. Using rich data on subjective expectations collected during the spring 2020 lockdown in the UK, we estimate a simple model of compliance behavior with uncertain costs and benefits, which we employ to quantify the utility trade-offs underlying compliance, to decompose group differences in compliance plans, and to compute the monetary compensation required for people to comply. We find that, on average, individuals assign the largest disutility to passing away from COVID-19 and being caught transgressing, and the largest utility to preserving their mental health. But we also document substantial heterogeneity in preferences and/or expectations by vulnerability status, gender, and other individual characteristics. In our data, both preferences and expectations matter for explaining gender differences in compliance, whereas compliance differences by vulnerability status are mainly driven by heterogeneity in preferences. We also investigate the relationship between own and others’ compliance. When others fail to comply and trust breaks down, individuals respond heterogeneously depending on their own circumstances and characteristics. When others around them comply less, those with higher risk tolerance and those without prior COVID-19 experience plan to comply less themselves, while the vulnerables plan to comply more. When a high-level public figure breaches the rules, supporters of the opposing political party plan to comply less. These findings emphasize the need for public health policies to account for heterogenous beliefs, preferences, and responses to others in citizens’ health behaviors. |
| JEL: | C25 C83 D84 I12 I18 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:hectdg:23/05&r=upt |
| By: | Dita Rari Dwi, Dita Rari; Basuki, Teguh Iman |
| Abstract: | The Covid 19 pandemic is a situation that illustrates the uncertainty of economic conditions nationally and globally and has an impact on how individuals should react to it in financial terms. Therefore, this study aims to examine the effect of financial literacy and mental accounting on financial decisions and spending interests in the COVID-19 pandemic situation based on prospect theory and behavioural life-cycle theory. The results of research on lecturers and staff respondents at STIE Equity Bandung - Indonesia, the SEM-PLS analysis results show that financial literacy and mental accounting have an effect on financial decisions, and only mental accounting has an effect on shopping interest. In terms of prospect theory, the research findings found that in pandemic situations, individuals generally behave in risk-aversion behaviour. Meanwhile, in the viewpoint of the behavioural life-cycle theory, individuals view money as current assets with precautionary reasons. |
| Keywords: | Financial literacy, financial decisions, mental accounting, shopping interest, Financial literacy, financial decisions, mental accounting, shopping interest |
| JEL: | G0 G02 |
| Date: | 2022–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117298&r=upt |
| By: | Fabian Bopp (Paderborn University) |
| Abstract: | Many people claim to intend to act pro-socially but fail to implement their intention when informing themselves about the consequences of their own action is necessary for a pro-social action. This attitude-behavior-gap is well documented, even in situations where informing can be done without additional costs. One reason for this attitude-behavior gap might be that after being informed the perceived social dilemma is increasing. It might become more obvious that one can not get both an individual and a socially optimal outcome. In this study, I am exploring whether reducing the potential dilemma in the second stage is affecting ignorance behavior in the first stage. Using a novel identification strategy with the disadvantage of a counter-directed confounding factor by defusing the dilemma size, this study finds no evidence for dilemma aversion being an important factor in explaining information avoidance behavior. |
| Keywords: | willful ignorance, strategic ignorance, conflict aversion, dilemma aversion, trade-off aversion |
| JEL: | C91 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:dispap:111&r=upt |
| By: | Christopher D. Carroll; Edmund Crawley; Håkon Tretvoll |
| Abstract: | Using a heterogeneous agent model calibrated to match measured spending dynamics over four years following an income shock (Fagereng, Holm, and Natvik (2021)), we assess the effectiveness of three fiscal stimulus policies employed during recent recessions. Unemployment insurance (UI) extensions are the clear “bang for the buck” winner, especially when effectiveness is measured in utility terms. Stimulus checks are second best and have the advantage (over UI) of being scalable to any desired size. A temporary (two-year) cut in the rate of wage taxation is considerably less effective than the other policies and has negligible effects in the version of our model without a multiplier. |
| Keywords: | fiscal stimulus; consumption; mpc |
| JEL: | E62 E21 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-02&r=upt |
| By: | Fazio, Andrea; Reggiani, Tommaso (Cardiff Business School) |
| Abstract: | We suggest that stabilizing the baseline income can make low-wage workers more tolerant towards high income earners. We present evidence of this attitude in the UK by exploiting the introduction of the National Minimum Wage (NMW), which institutionally sets a baseline pay reducing the risk of income losses and providing a clear reference point for British workers at the lower end of the income distribution. Based on data from the British Household Panel Survey (BHPS), we show that workers who benefited from the NMW program became relatively more tolerant of high incomes and more likely to support and vote for the Conservative Party. As far as tolerance for high incomes is related to tolerance of inequality, our results suggest that people advocate for equality also because they fear income losses below a given reference point. |
| Keywords: | Inequality, Redistribution, Minimum wage, Loss aversion, Reference Point, UK |
| JEL: | H10 H53 D63 D69 Z1 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/14&r=upt |
| By: | Giacomo Rubbini |
| Abstract: | Does dropping the rational expectations assumption mean the social planner can implement a larger class of social choice rules? This paper proposes a generalized model of implementation that does not assume rational expectations and characterizes the class of solution concepts requiring Bayesian Incentive Compatibility for full implementation. Surprisingly, full implementation of social choice functions turns out not to be significantly more permissive than with rational expectations. This implies some classical results, such as the impossibility of efficient bilateral trade (Myerson and Satterthwaite, 1983) hold for a broad range of non-equilibrium solution concepts, confirming their relevance even in boundedly rational setups. |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2305.07472&r=upt |
| By: | Arthur E. Attema (Erasmus University Rotterdam); Olivier L’haridon (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Jose Luis Pinto Prades (UNAV - Universidad de Navarra [Pamplona]) |
| Keywords: | altruism, ambiguity (or knightian uncertainty), behavioral health economics, experimental economics, health insurance, time trade off method |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04074732&r=upt |
| By: | Ernst Fehr; Gary Charness |
| Abstract: | We review the vast literature on social preferences by assessing what is known about their fundamental properties, their distribution in the broader population, and their consequences for important economic and political behaviors. We provide, in particular, an overview of the empirically identified characteristics of distributional preferences and how they are affected by merit, luck, and risk considerations as well as by concerns for equality of opportunity. In addition, we identify what is known about belief-dependent social preferences such as reciprocity and guilt aversion. The evidence indicates that the big majority of individuals have some sort of social preference while purely self-interested subjects are a minority. Our review also shows how the findings from laboratory experiments involving social preferences provide a deeper understanding of important field phenomena such as the consequences of wage inequality on work morale, employees’ resistance to wage cuts, individuals’ self-selection into occupations and sectors that are more or less prone to morally problematic behaviors, as well as issues of distributive politics. However, although a lot has been learned in recent decades about social preferences, there are still many important, unresolved, yet exciting, questions waiting to be tackled. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:432&r=upt |
| By: | Laura Veldkamp |
| Abstract: | Economic uncertainty is a powerful force in the modern economy. Research shows that surges in uncertainty can trigger business cycles, bank runs and asset price fluctuations. But where do sudden surges in uncertainty come from? This paper provides a data-disciplined theory of belief formation that explains large fluctuations in uncertainty. It argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Our main contribution is to explain why real-time estimation of distributions with non-normal tails results in large uncertainty fluctuations. We use theory and data to show how small changes in estimated skewness whip around probabilities of unobserved tail events (black swans). Our estimates, based on real-time GDP data, reveal that revisions in the estimates of black swan risk explain most of the fluctuations in uncertainty. |
| Keywords: | forecast bias; rational expectations; model uncertainty; expectations formation; bayesian econometrics |
| JEL: | D80 D84 C11 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-83&r=upt |
| By: | Antoine Soubeyran (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | As physics provides the equations of motion of a body, this paper formulates, for the first time, at the conceptual and mathematical levels, the inequations of motion of an individual seeking to meet his needs and quasi needs in an adaptive (not myopic) way. Successful (failed) dynamics perform a succession of moves, which are, at once, satisficing and worthwhile (free from too many sacrifices), or not. They approach or reach desires (fall in traps). They balance the desired speed of approach to a desired end (a distal promotion goal) with the size of the required immediate sacrifices to go fast (a proximal prevention goal). Therefore, each period, need/quasi need satisfaction success requires enough self control to be able to make, in the long run, sufficient progress in need/quasi need satisfaction without enduring, in the short run, too big sacrifices. A simple example (lose or gain weight) shows that the size of successful moves must be not too small and not too long. A second paper will solve this problem, using variational principles and inexact optimizing algorithms in mathematics. This strong multidisciplinary perspective refers to a recent mathematical model to psychology: the variational rationality theory of human life stay and change dynamics. |
| Keywords: | need satisfaction, speed of progress, sacrifices, dynamical system, variational rationality |
| Date: | 2022–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04065103&r=upt |
| By: | Barelli, Paulo (U of Rochester); Govindan, Srihari (U of Rochester); Wilson, Robert (Stanford U) |
| Abstract: | We study an economy with traders whose payoffs are quasilinear and their private signals are informative about an unobserved state parameter. The limit economy has infinitely many traders partitioned into a finite set of symmetry classes called types. It has a unique rational expectations Walrasian equilibrium (REE) whose price reveals the state. Total monotonicity, a property that limits heterogeneity across types, determines whether an efficient social choice function (SCF) is attainable using mechanisms in a class that includes auctions. An average crossing property on the primitives is a sufficient condition for total monotonicity. The REE is an efficient SCF so it is attainable by an auction if and only if it satisfies total monotonicity. REE with total monotonicity is not only attainable, but also implementable: it is approximated by the equilibrium outcomes of auctions with finitely many traders of each type and fine grids of the state, signals and bids. |
| JEL: | C7 D44 D82 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:4042&r=upt |