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on Utility Models and Prospect Theory |
| By: | Chakraborty, Anujit (University of California, Davis); Henkel, Luca (Erasmus University Rotterdam) |
| Abstract: | In prosocial decisions, decision-makers face interpersonal uncertainty–uncertainty about how their choices impact others' utility. We use three approaches to show how it shapes classic patterns of prosocial behavior like ingroup favoritism, merit-based fairness, and self-favoring behavior. First, we compare standard allocation decisions with decisions where we remove social consequences but retain uncertainty, revealing strikingly similar patterns across both. Second, we exogenously vary interpersonal uncertainty to estimate the aversion to interpersonal uncertainty and quantify how it combines with preferences to determine prosocial decisions. Finally, we show that self-reported interpersonal uncertainty systematic ally predicts behavior across individuals, choice patterns, and behavioral interventions. |
| Keywords: | prosocial behavior, decision-making under uncertainty, interpersonal uncertainty, ingroup favoritism, merit-based fairness, self-favoring behavior |
| JEL: | C91 D01 D91 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17708 |
| By: | Yevhen Havrylenko |
| Abstract: | We consider an optimal investment-consumption problem for a utility-maximizing investor who has access to assets with different liquidity and whose consumption rate as well as terminal wealth are subject to lower-bound constraints. Assuming utility functions that satisfy standard conditions, we develop a methodology for deriving the optimal strategies in semi-closed form. Our methodology is based on the generalized martingale approach and the decomposition of the problem into subproblems. We illustrate our approach by deriving explicit formulas for agents with power-utility functions and discuss potential extensions of the proposed framework. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.19213 |
| By: | Nahed Eddai (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes, IÉSEG School Of Management [Puteaux]); Ani Guerdjikova (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes) |
| Abstract: | We analyze the effect of strategic ambiguity and heterogeneous attitudes towards such ambiguity on optimal mitigation and adaptation. Pessimistic players tend to invest more in mitigation, while optimists favor adaptation. When adaptation is more expensive than mitigation, three types of equilibria can obtain depending on the level and distribution of ambiguity aversion: (i) a mitigation equilibrium, (ii) an adaptation equilibrium and (iii) a mixed equilibrium with both adaptation and mitigation. The interaction between ambiguity attitudes and wealth distribution plays a crucial role for the aggregate environmental policy: a wealth transfer from pessimistic to optimistic agents increases total mitigation. A similar result applies to the choice of an optimal mitigation subsidy, which is shown to increase in optimism, but decrease following a transfer of income towards the more optimistic players. Finally, we show that under strategic ambiguity, the introduction of a non-binding standard can impact agents' beliefs about their opponents' behavior and as a result lower total equilibrium mitigation. Our results highlight the necessity to consider attitudes towards strategic ambiguity in the design of economic policies targeting climate change. They might also shed some light on the slow rate of convergence of environmental policies across countries. |
| Keywords: | Climate policy, Ambiguity, Heterogeneity, Choquet expected utility |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-03590990 |
| By: | Thijs Kamma; Antoon Pelsser |
| Abstract: | This paper provides a dual formulation of the optimal consumption problem with internal multiplicative habit formation. In this problem, the agent derives utility from the ratio of consumption to the internal habit component. Due to this multiplicative specification of the habit model, the optimal consumption problem is not strictly concave and incorporates irremovable path-dependency. As a consequence, standard Lagrangian techniques fail to supply a candidate for the corresponding dual formulation. Using Fenchel's Duality Theorem, we manage to identify a candidate formulation and prove that it satisfies strong duality. On the basis of this strong duality result, we are able to derive duality relations that stipulate how the optimal primal controls depend on the optimal dual controls and vice versa. {Moreover, using the dual formulation, we develop an analytical evaluation mechanism to bound the accuracy of approximations to the optimal solutions. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.13678 |
| By: | Jiaming Mao; Jiayi Wen |
| Abstract: | Between 1980 and 2000, the U.S. experienced a significant rise in geographic sorting and educational homogamy, with college graduates increasingly concentrating in high-skill cities and marrying similarly educated spouses. We develop and estimate a spatial equilibrium model with local labor, housing, and marriage markets, incorporating a marriage matching framework with transferable utility. Using the model, we estimate trends in assortative preferences, quantify the interplay between marital and geographic sorting, and assess their combined impact on household inequality. Welfare analyses show that after accounting for marriage, the college well-being gap grew substantially more than the college wage gap. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.12867 |
| By: | Yuzhi Hao (Department of Economics, The Hong Kong University of Science and Technology); Danyang Xie (Thrust of Innovation, Policy, and Entrepreneurship, the Society Hub, The Hong Kong University of Science and Technology) |
| Abstract: | This paper pioneers a novel approach to economic and public policy analysis by leveraging multiple Large Language Models (LLMs) as heterogeneous artificial economic agents. We first evaluate five LLMs' economic decision-making capabilities in solving two-period consumption allocation problems under two distinct scenarios: with explicit utility functions and based on intuitive reasoning. While previous research has often simulated heterogeneity by solely varying prompts, our approach harnesses the inherent variations in analytical capabilities across different LLMs to model agents with diverse cognitive traits. Building on these findings, we construct a Multi-LLM-Agent-Based (MLAB) framework by mapping these LLMs to specific educational groups and corresponding income brackets. Using interest-income taxation as a case study, we demonstrate how the MLAB framework can simulate policy impacts across heterogeneous agents, offering a promising new direction for economic and public policy analysis by leveraging LLMs' human-like reasoning capabilities and computational power. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.16879 |
| By: | Jack Hirsch; Eric Tang |
| Abstract: | We study the effect of providing information to agents who queue before a scarce good is distributed at a fixed time. When agents have quasi-linear utility in time spent waiting, they choose entry times as they would bids in a descending auction. An information designer can influence their behavior by providing updates about the length of the queue. Many natural information policies release "sudden bad news, " which occurs when agents learn that the queue is longer than previously believed. We show that sudden bad news can cause assortative inefficiency by prompting a mass of agents to simultaneously attempt to join the queue. As a result, if the value distribution has an increasing (decreasing) hazard rate, information policies that release sudden bad news increase (decrease) total surplus, relative to releasing no information. When agents face entry costs to join the queue and the value distribution has a decreasing hazard rate, an information designer maximizes total surplus by announcing only when the queue is full. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.19553 |
| By: | Guanyu Jin; Roger J. A. Laeven; Dick den Hertog |
| Abstract: | This paper studies distributionally robust optimization for a large class of risk measures with ambiguity sets defined by $\phi$-divergences. The risk measures are allowed to be non-linear in probabilities, are represented by a Choquet integral possibly induced by a probability weighting function, and include many well-known examples (for example, CVaR, Mean-Median Deviation, Gini-type). Optimization for this class of robust risk measures is challenging due to their rank-dependent nature. We show that for many types of probability weighting functions including concave, convex and inverse $S$-shaped, the robust optimization problem can be reformulated into a rank-independent problem. In the case of a concave probability weighting function, the problem can be further reformulated into a convex optimization problem with finitely many constraints that admits explicit conic representability for a collection of canonical examples. While the number of constraints in general scales exponentially with the dimension of the state space, we circumvent this dimensionality curse and provide two types of upper and lower bounds algorithms. They yield tight upper and lower bounds on the exact optimal value and are formally shown to converge asymptotically. This is illustrated numerically in two examples given by a robust newsvendor problem and a robust portfolio choice problem. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.11780 |
| By: | Davide Carpentiere; Angelo Petralia |
| Abstract: | We show that many models of choice can be alternatively represented as special cases of choice with limited attention (Masatlioglu, Nakajima, and Ozbay, 2012), and the properties of the unobserved attention filters that explain the observed choices are singled out. Moreover, for each specification, we infer information about the DM's attention and preference from irrational features of choice data. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.14879 |
| By: | Yassire Elotmani (UM5 - Université Mohammed V de Rabat [Agdal]); Omar Hniche (UM5 - Université Mohammed V de Rabat [Agdal]); Nabil Sifouh (UM5 - Université Mohammed V de Rabat [Agdal]); Khadija Oubal (UM5 - Université Mohammed V de Rabat [Agdal]); Ismail Benslimane (ERMOT - Laboratoire "Etudes et recherches en Management des Organisations et des Territoires" [Fez] - USMBA - Université Sidi Mohamed Ben Abdellah); Sanae Benjelloun (ERMOT - Laboratoire "Etudes et recherches en Management des Organisations et des Territoires" [Fez] - USMBA - Université Sidi Mohamed Ben Abdellah) |
| Abstract: | The purpose of this paper is to analyze, through a theoretical synthesis, the various arguments provided by the financial literature in order to comprehend the nature of the irregularities observed in financial centers that contradict the Efficient Market Hypothesis (EMH). Our findings reveal differences of opinion regarding the nature of these anomalies; however, two groups of arguments can be identified. The first group concerns the rational explanations embraced by the proponents of the efficiency hypothesis, while the second group of arguments relates to the insights of behavioral finance, which support the notion of irrational behavior in order to explain the divergence of financial market dynamics from the rationality predicted by traditional finance. |
| Keywords: | anomalies, efficiency, rationality, irrationality, financial markets |
| Date: | 2024–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04936820 |
| By: | Yelwa, Mohammed; Anyanwu, Sarah O. |
| Abstract: | The study examined child development and family human capital investment decisions in Nigeria. The study focused on household per capita income and family structure using the Nigeria living standard survey for 2018/2019 for the secondary data analysis and a field survey conducted by the researchers in six states in each of the geopolitical zones in Nigeria for the primary data analysis. The study was anchored on household utility maximization theory using the ordinary least squares (OLS) method to analyse the secondary data. Four different results were obtained. First, the result of findings from the OLS estimate revealed that per capita income had no significant impact on Family Human Capital Investment Decisions (FHCID) and male perception of the cost of education had a significant positive impact on FHCID. On the contrary, multi-dimensional poverty index and female perception of the cost of education had an inverse significant impact on FHCID. The second result revealed that average household size, family residence from 1 to 30 minutes proximity to school and 31 minutes and above proximity to school had no significant impact on FHCID. Dependency ratio showed an inverse significant impact on FHCID and family literacy level showed a significant positive impact on FHCID. The third result from the binary logistics regression showed that age, occupation and place of residence of the household head had no significant impact on FHCID. Gender (female-headed household) and education showed an inverse significant impact on FHCID. However, household head years in business or paid employment showed a positive impact on FHCID. The fourth result from the binary logistics regression revealed that marital status had no significant impact on FHCID; family size had a significant negative impact on FHCID; and family structure (type of parents) and number of girl child in the household had a direct impact on FHCID. This study showed complementarities in the home utility function, such that the marginal product of investments rises as family living standards rise. These findings highlight lifetime inequalities and necessitates a special focus on treatments for low-income households. Understanding human capital development and how diverse elements interact is critical to combating poverty and its intergenerational transmission. As a result, this study made several recommendations. First, the importance of persistent action by the government and other donor agencies such as the United Nation Childrens Fund (UNICEF) and The World Bank to address the problems of income inequality and pervasive poverty ravaging Nigerias economy. The study strongly recommends that family, especially parents, maintain justice and fairness within the home, to foster constructive, sympathetic and peaceful home, encouraging most children to exhibit excellent academic performance. Third, government agencies and hospitals, especially in rural areas, intensify family planning and birth control campaign to help reduce household size. Fourth, children of the poor be given opportunities for paid employment, to enhance their performance in the school. Fifth, children from poor homes be provided with access to scholarships, free instructional materials and books. Sixth, government and its agencies on education intensify sensitization and campaign for families to embrace Western education, especially in the northern region, promote compulsory primary basic education for all children and prosecute parents of out-of-school children or child labour to serve as a deterrent to others. Finally, the study recommends that non-governmental and religious organizations preach peace and tolerance within the family for the well-being and human capital development of their wards. |
| Date: | 2024–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:41e815b9-8e3d-481c-90e5-9e3c536a14df |
| By: | Ken Kangda Wren |
| Abstract: | Existing approaches to asset-pricing under model-uncertainty adapt classical utility-maximisation frameworks and seek theoretical comprehensiveness. We move toward practice by considering binary model-uncertainties and by switching attention from 'preference' to 'constraints'. Economic asset-pricing in this setting is found to decompose into the viable pricing of model-risk and of non-model risk separately such that the former has a unique and intuitive risk-neutral equivalent formulation with convenient properties. Its parameter, a dynamically conserved constant of model-risk inference, allows an integrated representation of ex-ante risk-pricing and bias, such that their ex-post price-effects can be disentangled, through well-known price anomalies such as Moment and Low-Risk. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.13744 |