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on Utility Models and Prospect Theory |
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Issue of 2024‒04‒22
eleven papers chosen by |
| By: | Laurence Carassus; Massinissa Ferhoune |
| Abstract: | We study a robust utility maximization problem in a general discrete-time frictionless market. The investor is assumed to have a random, nonconcave and nondecreasing utility function, which may or may not be finite on the whole real-line. She also faces model ambiguity on her beliefs about the market, which is modeled through a set of priors. We prove, using only primal methods, the existence of an optimal investment strategy when the utility function is also upper-semicontinuous. For that, we introduce the new notion of projectively measurable functions. We show basic properties of these functions as stability under sums, differences, products, suprema, infima and compositions but also assuming the set-theoretical axiom of Projective Determinacy (PD) stability under integration and existence of $\epsilon$-optimal selectors. We consider projectively measurable random utility function and price process and assume that the graphs of the sets of local priors are projective sets. Our other assumptions are stated on a prior-by-prior basis and correspond to generally accepted assumptions in the literature on markets without ambiguity. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.11824&r=upt |
| By: | Ritesh Jain; Kirby Nielsen; |
| Abstract: | large literature has documented violations of expected utility consistent with a preference for certainty (the “certainty effect†), but recent studies question the prominence of this phenomenon. We design an experiment using lotteries spanning over the entire probability simplex to establish the prevalence of the certainty effect relative to its opposite. We find that violations of independence consistent with the reverse certainty effect are much more common than violations consistent with the certainty effect. Results hold as we test robustness along three dimensions: varying the mixing lottery, moving slightly away from certainty, and having a zero outcome. |
| Keywords: | independence axiom, expected utility theory, certainty effect, Allais Paradox, common ratio effect |
| JEL: | C79 D82 |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:202402&r=upt |
| By: | Haoge CHANG; NARITA Yusuke; SAITO Kota |
| Abstract: | We obtain a necessary and sufficient condition under which random-coefficient discrete choice models, such as mixed-logit models, are rich enough to approximate any nonparametric random utility models arbitrarily well across choice sets. The condition turns out to be the affine-independence of the set of characteristic vectors. When the condition fails, resulting in some random utility models that cannot be closely approximated, we identify preferences and substitution patterns that are challenging to approximate accurately. We also propose algorithms to quantify the magnitude of approximation errors. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24043&r=upt |
| By: | Marielle BRUNETTE; Stéphane COUTURE; Kene BOUN MY |
| Abstract: | Decisions under uncertainty are an integral part of the daily life of economic agents. However, if uncertainty bears on the probability, on the outcome, or on both, it may not be trivial. In this paper, we study how agents react to these di\u001Berent sources of uncertainty. For that purpose, we implemented a lab experiment with 209 students. We mainly show that the way the decision-makers behave when faced with di\u001Berent sources of uncertainty depends on the level of probability of winning a certain outcome. A majority of subjects thus prefers uncertainty to risk, regardless of the source, when the probability is low. For medium and high probability levels, most of the subjects prefers to face uncertainty on the outcome rather than uncertainty on the probability, whereas the opposite is true for low probability levels. Finally, we show that ambiguity preferences have a signi\u001Ccant e\u001Bect on the individual's behavior under all sources of uncertainty, whereas risk preferences play a role only when double uncertainty is at stake. |
| Keywords: | risk, uncertainty, ambiguity, experiments. |
| JEL: | D8 D9 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-15&r=upt |
| By: | Thomas Epper; Julien Senn; Ernst Fehr |
| Abstract: | The empirical evidence on the existence of social preferences—or lack thereof—is predominantly based on student samples. Yet, knowledge about whether these findings can be extended to the general population is still scarce. In this paper, we compare the distribution of social preferences in a student and in a representative sample. Using descriptive analysis and a rigorous clustering approach, we show that the distribution of the general population’s social preferences fundamentally differs from the students’ distribution. In the general population, three types emerge: an inequality averse, an altruistic, and a selfish type. In contrast, only the altruistic and the selfish types emerge in the student population. The absence of an inequality averse type in the student population is particularly striking considering the fact that this type comprises about 50 percent of the individuals in the general population sample. Using structural estimation, we show that differences in age and education are likely to explain these results. Younger and more educated individuals—which typically characterize students— not only tend to have lower degrees of other-regardingness but this reduction in other-regardingness basically nullifies behindness aversion among students. Differences in income, however, do not seem to affect social preferences. These findings provide a new cautionary tale that insights from student populations might not extrapolate to the general population. |
| Keywords: | social preferences, altruism, inequality aversion, preference heterogeneity, subject pools, sample selection |
| JEL: | C80 C90 D30 D63 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11009&r=upt |
| By: | Verde, Stefano F.; Di Cosmo, Valeria |
| Abstract: | This paper proposes a dynamic carbon tax (DCT) that stabilises gasoline prices by adjusting inversely to crude oil prices. Compared to a standard fixed-rate carbon tax, the DCT can be expected to cut more CO2 emissions while receiving greater public support. Therefore, it could be a useful instrument for accelerating the ecological transition. The analysis is articulated in three parts. First, we show how, in the context of vehicle choice decisions, any policy that reduces uncertainty about future gasoline prices improves the expected utility of more fuel-efficient vehicles relative to less efficient ones. Second, we show how a DCT could be designed to automatically stabilise gasoline prices and thereby reduce price uncertainty. Third, we conduct an econometric test for whether gasoline price volatility, considered as a proxy for price uncertainty, negatively affects vehicle fuel efficiency. Using microdata from the 2017 National Household Transport Survey, we test for negative correlation between gasoline price volatility and fuel efficiency of new vehicles sold in the US. Evidence of a negative correlation is indeed found despite limited volatility of gasoline prices in the study period. Further tests are warranted using data from different time periods and alternative model specifications. |
| Keywords: | Carbon taxation, Gasoline prices, Vehicle choice, Fuel efficiency, Energy transition |
| JEL: | H2 H23 H3 Q4 Q5 |
| Date: | 2024–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120485&r=upt |
| By: | In Kyung Kim (Department of Economics, Sogang University, Seoul, Korea); Kyoo il Kim (Department of Economics, Michigan State University) |
| Abstract: | We study the impact of a boycott on one of the largest Korean dairy producers, triggered by the exposure of the firm’s unethical management practices, on sales of its own and others. We find empirical evidence that the boycott had substantial and long-lasting consequences. First, consumer utility from the boycotted products decreased significantly, reflecting consumers’ strong willingness to take part in collective action. Second, our discrete choice demand model, which addresses both price endogeneity and product substitution, estimates that sales of the boycotted firm decreased by almost eight percent, or equivalently by 8.1 million liters during the 12-month post-boycott period. Third, the boycotted firm’s sales and revenue decreases would have been more severe had the firm not cut prices after the boycott outbreak. Our findings emphasize top-level managers’ role in fostering an ethical organizational culture within the firm and taking proper and timely countermeasures to curb losses incurred by a boycott. |
| Keywords: | boycott, CSR, discrete choice demand, milk |
| JEL: | D12 L66 M14 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:2401&r=upt |
| By: | Nail Kashaev; Martin Pl\'avala; Victor H. Aguiar |
| Abstract: | We study joint probabilistic choice rules that describe the behavior of two decision makers, each facing a possibly different menu. These choice rules are separable when they can be factored into autonomous choices from each individual solely correlated through their individual probabilistic choice rules. Despite recent interest in studying such rules, a complete characterization of the restrictions on them remains an open question. A reasonable conjecture is that such restrictions on separable joint choice can be factored into individual choice restrictions. We name these restrictions separable and show that this conjecture is true if and only if the probabilistic choice rule of at least one decision maker uniquely identifies the distribution over deterministic choice rules. Otherwise, entangled choice rules exist that satisfy separable restrictions yet are not separable. The possibility of entangled choice complicates the characterization of separable choice since one needs to augment the separable restrictions with the new emerging ones. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.09045&r=upt |
| By: | José A. Rodrigues-Neto (Research School of Economics, Australian National University); Matthew Ryan (Department of Economics and Finance, Auckland University of Technology); James Taylor (Research School of Economics, Australian National University) |
| Abstract: | The classical Luce model (Luce, 1959) assumes positivity of random choice: each available alternative is chosen with strictly positive probability. The model is characterised by Luce's choice axiom. Ahumada and Ülkü (2018) and (independently) Echenique and Saito (2019) define the general Luce model (GLM), which relaxes the positivity assumption, and show that it is characterised by a cyclical independence (CI) axiom. Cerreia-Vioglio et al. (2021) subsequently proved that the choice axiom characterises an important special case of the GLM in which a rational choice function (i.e., one that may be rationalised by a weak order) first selects the acceptable alternatives from the given menu, with any residual indifference resolved randomly in Luce fashion. The choice axiom is thus revealed as a fundamental “canon of probabilistic rationality". This result assumes that choice behaviour is specified for all non-empty, finite menus that can be constructed from a given universe, X, of alternatives. We relax this assumption by allowing choice behaviour to be specified for an arbitrary collection of non-empty, finite menus. In this context, we show that the Cerreia-Vioglio et al. (2021) result obtains when the choice axiom is replaced with a mild strengthening of CI. The latter condition implies the choice axiom, thus providing a “stricter canon". |
| Keywords: | : |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:2024-04&r=upt |
| By: | Petri P. Karenlampi |
| Abstract: | Periodic growth processes are investigated. The expected value of the profit rate, on accrual basis, does not directly depend on divestments, neither on the capitalization path. The expected value of capitalization is path dependent. Because of the path-dependent capitalization, the return rate on capital is path-dependent, and the time-average return rate on capital differs from the expected-value return rate on capital for the growth cycle. In the absence of intermediate divestments, the internal rate of return is path-independent, thereby differing from the expected value of the rate of return on capital. It is shown that the rotation cycle length maximizing the return rate on equity is independent of market interest rate. Leveraging effect enters the microeconomics of the growth processes through a separate leveraging equation, where the leverage coefficient may reach positive or negative values. Correspondingly, from the viewpoint of wealth accumulation, the often-suggested dependency of suitable rotation length on discount rate appears to be a modeling artifact. In other words, the net present value computation is based on maximization of consumption utility, instead of a capital growth objective; borrowing is obligatory, but the leverage effect is absent. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.08678&r=upt |
| By: | Athanasios Andrikopoulos; Nikolaos Sampanis |
| Abstract: | The theory of optimal choice sets is a solution theory that has a long and well-established tradition in social choice and game theories. Some of important general solution concepts of choice problems when the set of best alternatives does not exist (this problem occurs when the preferences yielded by an economic process are cyclic) is the Stable Set (Von Neumann-Morgenstern set) and its variants (Generalized Stable set, Extended Stable set, m-Stable set and w-Stable set). The theory of w-stable sets solution is more realistic because: (1) It solves the existence problem of solution; (2) It expands the notions of maximal alternative set and (3) The concept of stability is defined in such a way as to prevent a chosen alternative from being dominated by another alternative and sets this stability within the solution. In this paper, we present a topological characterization of the existence of w-Stable sets solution of arbitrary binary relations over non-finite sets of alternatives. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.04512&r=upt |