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on Utility Models and Prospect Theory |
| By: | Paul H. Y. Cheung; Yusufcan Masatlioglu |
| Abstract: | We explore the influence of framing on decision-making, where some products are framed (e.g., displayed, recommended, endorsed, or labeled). We introduce a novel choice function that captures observed variations in framed alternatives. Building on this, we conduct a comprehensive revealed preference analysis, employing the concept of frame-dependent utility using both deterministic and probabilistic data. We demonstrate that simple and intuitive behavioral principles characterize our frame-dependent random utility model (FRUM), which offers testable conditions even with limited data. Finally, we introduce a parametric model to increase the tractability of FRUM. We also discuss how to recover the choice types in our framework. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.00209 |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We consider agents in an exchange economy having preferences represented by scale invariant recursive utility, where the dynamics of both consumption and risky assets are given by jump-diffusions. In this setting we find state prices, where both diffusion and jump-size risk are priced. By including jumps, the theory has the potential to model insurance markets, as well as ordinary securities’ markets. In the latter case, we derive the equilibrium, real interest rate and risk premiums. In the former case we consider catastrophe futures related to negative shocks in consumption. We use the stochastic maximum principle to analyze the model. This method uses forward/backward stochastic differential equations, and seems indispensable in this theory. |
| Keywords: | Recursive utility; jump dynamics; the stochastic maximum principle; jump size risk; catastrophe futures |
| JEL: | D51 D53 D90 E21 G10 G12 |
| Date: | 2025–02–24 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_006 |
| By: | Jean-Pierre Drugeon (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thai Ha-Huy (Université Paris-Saclay, EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay) |
| Abstract: | This paper provides a framework for understanding preferences over utility streams across different time periods. We analyze preferences for the close future, for the distant future, and a synthesis of both, establishing a representation involving weights over time periods. Examining scenarios where two utility streams cannot be robustly compared to each other, we introduce notions in which one has more "potential" to be preferred over another, which lead to MaxMin, MaxMax, and -MaxMin representations. Finally, we consider temporal bias in the form of violations of stationarity. For close future preferences, we obtain a generalization of quasi-hyperbolic discounting. For distant future preferences, we obtain Banach limits and discuss the relationship with exponential discounting. |
| Keywords: | Axiomatization, Myopia, Multiple discounts, Alpha-MaxMin criteria, Temporal biases, Banach limits |
| Date: | 2023–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:halshs-04331306 |
| By: | Hélène Halconruy (IP Paris - Institut Polytechnique de Paris, TSP - CITI - Communications, Images et Traitement de l'Information - IMT - Institut Mines-Télécom [Paris] - TSP - Télécom SudParis, SOP - SAMOVAR - Statistiques, Optimisation, Probabilités - SAMOVAR - Services répartis, Architectures, MOdélisation, Validation, Administration des Réseaux - IMT - Institut Mines-Télécom [Paris] - TSP - Télécom SudParis, MODAL'X - Modélisation aléatoire de Paris X - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We study insider trading in a jump-binomial model of the financial market that is based on a marked binomial process and that serves as a suitable alternative to some classical trinomial models. Our investigations focus on the two main questions: measuring the advantage of the insider's additional information and stating a closed form for her hedging strategy. Our approach is based on the results of enlargement of filtration in a discrete-time setting stated by Blanchet-Scalliet and Jeanblanc (in: From probability to finance, Springer, Berlin, 2020) and on a stochastic analysis for marked binomial processes developed in the companion paper (Halconruy in Electron J Probab 27:1-39, 2022). Our work provides in a discrete-time and an incomplete market setting the analogues of some results of Amendinger et al. ( |
| Keywords: | Insider trading Trinomial model Enlargement of filtrations Malliavin's calculus Utility maximization JEL Classification G11 G14 C61 C02, Insider trading, Trinomial model, Enlargement of filtrations, Malliavin's calculus, Utility maximization JEL Classification G11, G14, C61, C02, Insider trading trinomial model enlargement of filtrations Malliavin's calculus utility maximization PACS 60J74 60G55 91G20 60H30 60H07 91G10 94A17. JEL Classification G11 G14 C61 C02, trinomial model, enlargement of filtrations, utility maximization PACS 60J74, 60G55, 91G20, 60H30, 60H07, 91G10, 94A17. JEL Classification G11 |
| Date: | 2023–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04346427 |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We consider optimal risk sharing where agents have preferences represented by translation invariant recursive utility. The dynamics in continuous time is driven by diffusion processes and a random jump measure. The model has some appealing features compared to the scale invariant version. Economic effects of sudden events, like catastrophes or pandemics, can be interpreted and separated from ordinary shocks to the economy. Unlike the scale invariant version, this model allows for a treatment of heterogeneous preferences, and consequently optimal risk sharing at a general and basic level. A new endogenous variable, a traded security, enters via the preference structure, affecting the key relations between agents. We also implement a stock market in this setting, and derive a consumption based capital asset model. A catastrophe-insurance forward contract is analyzed as an application of our general model, where the jump part is priced and plays the essential role. |
| Keywords: | Optimal risk sharing; recursive utility; translation invariance; jump dynamics; CCAPM; the stochastic maximum principle; the mutuality principle; catastrophe forward contracts |
| JEL: | C40 C41 C53 R40 R41 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_005 |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay); Carmen Camacho (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thai Ha-Huy (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay) |
| Abstract: | In a simple discrete-time version of Lucas (1988) we find that the Balanced Growth Path (BGP) is always the unique optimal planner's solution: with linear or strictly concave production functions, with unbounded utility functions, with or without human capital depreciation. When the "speed" of human capital accumulation is high, the optimal working time is constant and below its upper bound. Capital grows at a constant factor, but degrowth is also possible when this factor is less one (under positive capital depreciation). When this speed is low, optimal working time is at its boundary and capital declines at its depreciation factor (degrowth). |
| Keywords: | Human capital, Balanced growth path |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:halshs-04805609 |
| By: | Ilke Aydogan (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie´ Management, F-59000 Lille, France; and iRisk Research Center on Risk and Uncertainty); Loïc Berger (CNRS, Univ. Lille, IESEG School of Management, UMR 9221 - LEM - Lille Economie´ Management, F-59000 Lille, France; iRisk Research Center on Risk and Uncertainty; RFF-CMCC European Institute on Economics and the Environment (EIEE), and Centro Euro-Mediterraneo sui Cambiamenti Climatici, Italy); Vincent Theroude (Université de Lorraine, Université de Strasbourg, CNRS, BETA, 54000, Nancy, France) |
| Abstract: | We investigate the validity of a double random incentive system where only a subset of subjects is paid for one of their choices. By focusing on individual decisionmaking under risk and ambiguity, we show that using either a standard random incentive system, where all subjects are paid, or a double random system, where only 10% of subjects are paid, yields similar preference elicitation results. These findings suggest that adopting a double random incentive system could significantly reduce experimental costs and logistic e orts, thereby facilitating the exploration of individual decision-making in larger-scale and higher-stakes experiments. |
| Keywords: | Experimental methodology, Payment methods, Incentives, Ambiguity elicitation |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ies:wpaper:e202417 |
| By: | Chihiro Shimizu; Erwin Diewert; Naohito Abe; Akiyuki Tonogi |
| Abstract: | The paper uses monthly scanner data on purchases of rice in six Japanese Prefectures over the 24 months in the years 2021 and 2022 in order to calculate alternative price indexes that are free from chain drift. The paper also attempts to measure the welfare effects of differing product availability across the six prefectures. In order to eliminate the chain drift problem, the following multilateral indexes were computed: GEKS, Geary-Khamis and Weighted Time Product Dummy Hedonic price indexes. Chain drift can also be eliminated by estimating purchaser preferences using consumer demand theory. Thus the paper uses the Japanese rice data to estimate linear preferences, CES preferences and Konüs Byushgens Fisher preferences (with a rank one substitution matrix). Feenstra (1994) worked out a method for measuring the gains (or losses) of utility from new and disappearing products and his method is adapted to measuring the welfare effects of differing degrees of product availability across the Prefectures. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:tcr:wpaper:e211 |
| By: | Luca Delle Foglie (DEF, University of Rome "Tor Vergata"); Stefano Papa (DEF, University of Rome "Tor Vergata"); Giancarlo Spagnolo (CEIS & DEF, University of Rome "Tor Vergata") |
| Abstract: | We examine how betrayal aversion and ambiguity attitudes influence trust. To disentangle these effects, we use a Trust game and manipulate trustors’ perception of being the intentional recipients of trustees’ betrayal by varying the nature of the latter: a human or a machine that replicates human choices in probability. After confirming that this manipulation does not affect ambiguity attitudes or beliefs about others’ behavior, we find that both factors significantly influence trust. Nonetheless, even when controlling for these attitudes and beliefs, participants exhibit lower trust in humans than in machine. Furthermore, using Noldus’ FaceReader technology to measure emotions during trustors’ decision-making process, we find that participants express greater anger toward human trustees. Our results indicate that both betrayal aversion and ambiguity attitudes play important roles in shaping trust decisions. |
| Keywords: | Ambiguity attitudes, Anger, Betrayal cost, Emotions, FaceReader, Trust game |
| JEL: | A13 C91 D03 D64 D90 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:593 |
| By: | Pongou, Roland; Sidie, Ghislain Junior |
| Abstract: | Ranked voting is an election format in which each voter ranks candidates on a ballot, and individual rankings are aggregated using a general rule to produce a social ranking. This paper proposes a non-cooperative model of this electoral system. The setting allows for unequal voting rights, abstention, and social incomparability of candidates, and each voter's utility is measured by how close his or her true preferences are to the social ranking. The analysis uncovers three main findings. First, it proves the existence of a pure strategy Nash equilibrium. Second, it shows that truthtelling is always a Nash equilibrium regardless of the voting rule and the structure of individual preferences. Third, under mild conditions, truthtelling is Pareto-efficient when voters have strict preferences. Extending the analysis to majoritarian elections with costly voluntary participation shows that truthtelling is an equilibrium if and only if the costs of participation are not too high and the election is tight. The findings have implications for the design of ranked voting systems that are compatible with truthtelling and efficiency while allowing unrestricted freedom in the choice of the voting rule. A reinterpretation of the model in the context of intrapersonal bargaining, where the decision-maker has multiple rational selves, has implications for the occurrence of cyclic individual choices that reflect stable and efficient behavioral patterns. |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10837 |
| By: | Hötte, Kerstin; Jee, Su Jung |
| Abstract: | Escaping the middle-income trap requires a country to develop indigenous technological capabilities for high value-added innovation. This study examines the role of second-tier patent systems, known as utility models (UMs), in promoting such capability acquisition in less developed countries. UMs are designed to incentivize incremental and adaptive innovation through lower novelty standards than patents, but their long-term impact on the capability acquisition process remains underexplored. Using South Korea as a case study and drawing on the characteristics of technological regimes in catching-up economies, we present three key findings: First, the country's post-catch-up frontier technologies (US patents) are more impactful (highly cited) when they build on Korean domestic UMs. This suggests that UM-based imitative and adaptive learning laid the foundation for the country's globally competitive capabilities. Second, the impact of UM-based learning diminishes as the country's economy develops. Third, frontier technologies rooted in UMs contribute more to the country's own specialization than to follow-on innovations by foreign actors, compared to technologies without UM linkages. We discuss how technological regimes and industrial policies in catching-up economies interact with the UM system to bridge the catching-up (imitation- and adaptation-based) and postcatching-up (specialization- and creativity-based) phases. |
| Keywords: | utility model, intellectual property rights, middle-income trap, technological capabilities, specialization |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:amz:wpaper:2024-05 |
| By: | Rajesh P. Narayanan; R. Kelley Pace |
| Abstract: | Emergent technologies such as solar power, electric vehicles, and artificial intelligence (AI) often exhibit exponential or power function price declines and various ``S-curves'' of adoption. We show that under CES and VES utility, such price and adoption curves are functionally linked. When price declines follow Moore's, Wright's and AI scaling "Laws, '' the S-curve of adoption is Logistic or Log-Logistic whose slope depends on the interaction between an experience parameter and the elasticity of substitution between the incumbent and emergent good. These functional relations can serve as a building block for more complex models and guide empirical specifications of technology adoption. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.00909 |
| By: | Motta, Matt (Boston University School of Public Health); Trujillo, Kristin Lunz (University of South Carolina); Stecula, Dominik (University of Pennsylvania); Callaghan, Timothy; Ophir, Yotam; Walter, Dror |
| Abstract: | Background. A highly pathogenic strain of avian influenza (H5N1, or “bird flu”) began circulating across poultry farms worldwide in 2020. While the virus has been transmitted to mammals and humans in the past, media attention to the potential impact of H5N1 on human health following the documentation of unprecedented transmission between mammals in Spring 2024; including the prevalence of H5N1 in the commercial dairy supply. Objective. To quantify (a) the prevalence and (b) socio-political correlates (e.g., partisan identity, attitudes toward scientific expertise) of public concern about H5N1, as well as support for policy action aimed at reducing its potential risks to human health. Method. In a nationally representative longitudinal survey of N = 831 US adults, we asked respondents to answer a series of questions about the levels of concern about H5N1 transmission to humans, beliefs about the safety of consuming unpasteurized milk products, and support for government interventions aimed at reducing the public health risks posed by avian influenza outbreaks. Results. We find that a small minority of Americans express concern about the public health risks of H5N1, or reject misinformation about the safety of raw milk consumption. Low levels of concern and raw milk misinformation are in turn associated with opposition to policies aimed at reducing the public health risks borne by H5N1, as is both anti-intellectual attitude endorsement and partisan identification with the Republican Party. Conclusions. Public apathy about the public health risks borne by avian flu – and corresponding indifferences toward mitigating policy action – could undermine US pandemic preparedness. Lacking clear signals from the public to take action to address this important issue, policymakers may be reluctant to pursue policies that reduce avian influenza’s pandemic potential. |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:j94zg_v1 |