|
on Utility Models and Prospect Theory |
|
Issue of 2024‒02‒12
twelve papers chosen by |
| By: | Jean-Gabriel Lauzier; Liyuan Lin; Ruodu Wang |
| Abstract: | We analyze the problem of optimally sharing risk using allocations that exhibit counter-monotonicity, the most extreme form of negative dependence. Counter-monotonic allocations take the form of either "winner-takes-all" lotteries or "loser-loses-all" lotteries, and we respectively refer to these (normalized) cases as jackpot or scapegoat allocations. Our main theorem, the counter-monotonic improvement theorem, states that for a given set of random variables that are either all bounded from below or all bounded from above, one can always find a set of counter-monotonic random variables such that each component is greater or equal than its counterpart in the convex order. We show that Pareto optimal allocations, if they exist, must be jackpot allocations when all agents are risk seeking. We essentially obtain the opposite when all agents have discontinuous Bernoulli utility functions, as scapegoat allocations maximize the probability of being above the discontinuity threshold. We also consider the case of rank-dependent expected utility (RDU) agents and find conditions which guarantee that RDU agents prefer jackpot allocations. We provide an application for the mining of cryptocurrencies and show that in contrast to risk-averse miners, RDU miners with small computing power never join a mining pool. Finally, we characterize the competitive equilibria with risk-seeking agents, providing a first and second fundamental theorem of welfare economics where all equilibrium allocations are jackpot allocations. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.03328&r=upt |
| By: | Xue Cheng; Peng Guo; Tai-ho Wang |
| Abstract: | The paper addresses the problem of meta order execution from a broker-dealer's point of view in Almgren-Chriss model under order fill uncertainty. A broker-dealer agency is authorized to execute an order of trading on client's behalf. The strategies that the agent is allowed to deploy is subject to a benchmark, referred to as the reservation strategy, regulated by the client. We formulate the broker's problem as a utility maximization problem in which the broker seeks to maximize his utility of excess profit-and-loss at the execution horizon. Optimal strategy in feedback form is obtained in closed form. In the absence of execution risk, the optimal strategies subject to reservation strategies are deterministic. We establish an affine structure among the trading trajectories under optimal strategies subject to general reservation strategies using implementation shortfall and target close orders as basis. We conclude the paper with numerical experiments illustrating the trading trajectories as well as histograms of terminal wealth and utility at investment horizon under optimal strategies versus those under TWAP strategies. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.03305&r=upt |
| By: | Chen, Yi-Hsuan; Kräussl, Roman; Verwijmeren, Patrick |
| Abstract: | The intersection of recent advancements in generative artificial intelligence and blockchain technology has propelled digital art into the spotlight. Digital art pricing recognizes that owners derive utility beyond the artwork's inherent value. We incorporate the consumption utility associated with digital art and model the stochastic discount factor and risk premiums. Furthermore, we conduct a calibration analysis to analyze the effects of shifts in the real and digital economy. Higher returns are required in a digital market upswing due to increased exposure to systematic risk and digital art prices are especially responsive to fluctuations in business cycles within digital markets. |
| Keywords: | Digital art, conspicuous consumption, utility dividends, risk premium, valuation |
| JEL: | D8 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:281200&r=upt |
| By: | Ilke Aydogan (IÉSEG School Of Management [Puteaux]); Loïc Berger (CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna]); Valentina Bosetti (Bocconi University [Milan, Italy], EIEE - European Institute on Economics and the Environment, CMCC - Centro Euro-Mediterraneo per i Cambiamenti Climatici [Bologna]) |
| Abstract: | We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty, entailing different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects only. Overall, regardless of the subject's sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities. |
| Date: | 2023–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04370668&r=upt |
| By: | Eric Bahel |
| Abstract: | We study three axioms in the model of constrained social choice under uncertainty where (i) agents have subjective expected utility preferences over acts and (ii) different states of nature have (possibly) different sets of available outcomes. Anonymity says that agents' names or labels should never play a role in the mechanism used to select the social act. Strategy-proofness requires that reporting one's true preferences be a (weakly) dominant strategy for each agent in the associated direct revelation game. Range unanimity essentially says that a feasible act must be selected by society whenever it is reported as every voter's favorite act within the range of the mechanism. We first show that every social choice function satisfying these three axioms can be factored as a product of voting rules that are either constant or binary (always yielding one of two pre-specified outcomes in each state). We describe four basic types of binary factors: three of these types are novel to this literature and exploit the voters' subjective beliefs. Our characterization result then states that a social choice function is anonymous, strategy-proof and range-unanimous if and only if every binary factor (in its canonical factorization) is of one of these four basic types. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.04060&r=upt |
| By: | Seongbeom Park |
| Abstract: | Many countries around the world, including Korea, use the school choice lottery system. However, this method has a problem in that many students are assigned to less-preferred schools based on the lottery results. In addition, the task of finding a good assignment with ties often has a time complexity of NP, making it a very difficult problem to improve the quality of the assignment. In this paper, we prove that the problem of finding a stable matching that maximizes the student-oriented preference utility in a two-sided market with one-sided preference can be solved in polynomial time, and we verify through experiments that the quality of assignment is improved. The main contributions of this paper are as follows. We found that stable student-oriented allocation in a two-sided market with one-sided preferences is the same as stable allocation in a two-sided market with symmetric preferences. In addition, we defined a method to quantify the quality of allocation from a preference utilitarian perspective. Based on the above two, it was proven that the problem of finding a stable match that maximizes the preference utility in a two-sided market with homogeneous preferences can be reduced to an allocation problem. In this paper, through an experiment, we quantitatively verified that optimal student assignment assigns more students to schools of higher preference, even in situations where many students are assigned to schools of low preference using the existing assignment method. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.03231&r=upt |
| By: | Avner Seror |
| Abstract: | In this paper, I introduce the Priced Survey Methodology (PSM), a tool designed to overcome the limitations of traditional survey methods in analyzing social preferences. The PSM's design draws inspiration from consumption choice experiments, as respondents fill out the same survey multiple times under different choice sets. I generalize Afriat's theorem and show that the Generalized Axiom of Revealed Preferences is necessary and sufficient for the existence of a concave, continuous, and single-peaked utility function rationalizing answers to the PSM. This result has two major implications. First, it is possible to measure a respondent's ideal answer to a survey using only ordinal relations between possible answers. Second, the PSM captures aspects of social preferences often overlooked in standard surveys, such as the relative importance that respondents attribute to different survey questions. I deploy a PSM measuring altruistic preferences in a sample of online participants, recover respondents' single-peaked preferences, and draw several implications. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.03876&r=upt |
| By: | Bailey, Ralph W. (Department of Economics, University of Birmingham); Kozlovskaya, Maria (Economics, Finance and Entrepreneurship Department, Aston Business School); Ray, Indrajit (Cardiff Business School) |
| Abstract: | We analyse the conditions for a strategy profile to be an equilibrium in a specific buy and sell strategic market game, with two goods, using best responses of a player against random bids from the opponents. The difficulty in characterising mixed Nash equilbria is that the expected utility is not quasiconcave in strategies. We still prove that any mixed strategy Nash equilibrium profile in which every player faces only two random bids is trivial, that is, is a convex combination of some pure strategy Nash equilibria; moreover, we show that the outcome (the price and the allocations) is deterministic in such an equilibrium. |
| Keywords: | Mixed bids ; Mixed strategy Nash equilibrium ; strategic market games JEL codes: C72 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:82&r=upt |
| By: | Gal Amedi (Bank of Israel) |
| Abstract: | Accessibility is a key factor in the utility from living in different areas. In urban models, accessibility is theoretically expected to be internalized by the residential market, creating an 'accessibility premium' in areas with better accessibility. Previous case-study literature found significant and largely unexplained variation in the transit accessibility premium in different urban contexts. This paper proposes a new approach to uncovering the determinants of this variation in a unified framework, utilizing a theoretically grounded measure of accessibility, and both causal machine learning and standard econometric methods applied to highly granular nationwide data on rents and the transportation network. I find that high residential density, mixed-use zoning, and a demographic composition better reflecting typical transit users imply a larger transit accessibility premium. This premium is also higher in areas with a low level of services compared to a reasonable reference point, and positive only up to a threshold level of services. There is some evidence that proximity to rail systems implies a premium over and above the expected premium implied by a reduction in travel times alone. The estimated effect is usually modest. |
| JEL: | R40 R31 R23 R12 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2023.12&r=upt |
| By: | Mohammed Abdellaoui (HEC Paris - Ecole des Hautes Etudes Commerciales); Han Bleichrodt (UA - Université d'Alicante, Espagne); Cédric Gutierrez (Università Bocconi) |
| Abstract: | Overconfident behavior, the excessive willingness to bet on one's performance, may be driven by optimistic beliefs and/or ambiguity attitudes. Separating these factors is key for understanding and correcting overconfident behavior, as they call for different corrective actions. We present a method to do so, which we implement in two incentivized experiments. The first experiment shows the importance of ambiguity attitudes for overconfident behavior. Optimistic ambiguity attitudes (ambiguity seeking) counterbalanced the effect of pessimistic beliefs, leading to neither over- nor underconfident behavior. The second experiment applies our method in contexts where overconfident behavior is expected to vary: easy versus hard tasks. Our results showed that task difficulty affected both beliefs and ambiguity attitudes. However, although beliefs were more optimistic for relative performance (rank) and more pessimistic for absolute performance (score) on easy tasks compared with hard tasks, ambiguity attitudes were always more optimistic on easy tasks for both absolute and relative performance. Our findings show the subtle interplay between beliefs and ambiguity attitudes: they can reinforce or offset each other, depending on the context, increasing or lowering overconfident behavior. This paper was accepted by Yuval Rottenstreich, behavioral economics and decision analysis. Funding: This work was supported by HEC Paris research budget and Bocconi junior researchers' grants. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2021.00165 . |
| Date: | 2023–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04383402&r=upt |
| By: | Allayioti, Anastasia; Venditti, Fabrizio |
| Abstract: | Commodity prices co-move, but the strength of this co-movement changes over time due to structural factors, like changing energy intensity in production and consumption as well as changing composition of underlying shocks. This paper explores whether econometric models that exploit this co-movement and account for parameter instability provide more accurate point and density forecasts of ten major commodity indices viz-a-viz constant coefficient models. Improvements in point forecast accuracy are small, with predictability varying substantially across forecast horizons and commodity indices, but they are large and significant in terms of density forecasting. An economic evaluation reveals that allowing for parameter time variation and commonalities leads to higher portfolios returns, and to higher utility values for investors. JEL Classification: C32, C52, C53, C55, E37 |
| Keywords: | commodities, commonalities, density forecasting, economic evaluation, instabilities |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242901&r=upt |
| By: | Jean-Alain Heraud; Phu Nguyen-Van (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Thi Kim Cuong Pham (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Purpose This paper analyzes individual subjective well-being using a survey database from the Strasbourg metropolitan development council (France). The authors focus on the effects of externalities generated by public services (transport, culture and sport), environmental quality and feeling of security in the Strasbourg metropolitan area (Eurométropole de Strasbourg, EMS). Results show that EMS specificities (public facilities, environmental quality, safety and security) and individual features like opportunities to laugh or live with children significantly influence individual well-being. These findings are robust when using three subjective measures: feeling of well-being, environmental satisfaction and social life satisfaction. The authors also show that income may affect the perceived well-being of individuals belonging to a low-income group, while individuals belonging to a high-income group tend to be unsatisfied with environmental quality but satisfied with their social life. Besides, social comparison in terms of income does not matter for individual well-being in the Strasbourg metropolitan area. Design/methodology/approach Theoretical and empirical paper —Utility theory in economics—Econometric modeling using an ordered probit model. Findings Specificities of the Strasbourg metropolitan area-France (public services related to transport, culture and sport, environmental quality perceived as convenient for individual health, sense of security) significantly impact individual subjective well-being. Income does not substantially impact the individual subjective perception of happiness: income may matter for the feeling of well-being only for individuals belonging to a low-income group. Wealthy individuals tend to be unsatisfied with environmental quality but satisfied with their social life. Social comparison in terms of income does not matter for individual well-being in the Strasbourg metropolitan area. Research limitations/implications Cross-sectional data, but it is the only available database from a survey conducted by EMS in 2017 to collect information on potential elements relative to individual well-being in the Strasbourg metropolitan area. Practical implications Results shed light on the role of territorial policies in improving individual well-being and might provide some guidelines for policy-makers concerned about the population's welfare. Policy-makers should give strong attention to public facilities (an essential element of local public action) and improve environmental quality. If they care about the population's happiness, they have to reorient current policies in this direction. Of course, through the inquiry in 2017 giving this database, the Strasbourg agglomeration development council aimed to provide such evidence to the local administration. Nevertheless, the results were a bit upsetting for many people in the administrative and political circles, who generally prioritize economic and demographic development, while the citizens' responses to the inquiry have revealed a strong focus on the quality of everyday life in their neighborhood. Originality/value The present study contributes to the literature on subjective well-being, with a focus on the role of local characteristics and living environment. The authors' starting point is related to the standard utility theory, indicating that environmental quality and public services are positive externalities. The authors investigate whether the local living environment and public facilities are crucial elements explaining individual well-being. To do this, we consider three subjective measures: feeling of well-being, environmental satisfaction and social life satisfaction, which are used as proxies of individual utility. The authors consider different explicative variables representing specificities of EMS in terms of public services (transport, culture and sport), environmental quality perceived as convenient for individual health, safety and security, etc. The authors also provide a test for relative standing by including the median monthly household income at the municipality level. |
| Date: | 2023–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04384531&r=upt |