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on Utility Models and Prospect Theory |
| By: | knut Anton Mork (Department of Economics, Norwegian University of Science and Technology); Frida Nymark Engelstad (Department of Economics, Norwegian University of Science and Technology) |
| Abstract: | We solve the Merton problem for an agent with a soft internal habit whose utility is defined over the consumption-habit ratio, and where the curvature of the utility function jumps discretely to a higher level when consumption falls below the habit. The habit evolves over time as a weighted average of past consumption, so that current consumption choices have consequences for future habits. We solve the model numerically in continuous time. Optimal behavior is characterized by extensive consumption smoothing and risk taking that is high on average but varies significantly with wealth. Withdrawal rates tend to fall below portfolio rates of return, so that wealth and consumption tend to grow exponentially over time, like in AK macro models. A lack of self-awareness, whereby the agent underestimates the rate at which habits catch up with consumption, leads to significant, though hardly huge, loss of utility. Simpler rules, such as constant withdrawal rates and equity shares over time, lead to utility losses in similar orders of magnitude. However, when withdrawal rates are held constant, risk taking must be significantly lower to be optimal in a constrained sense. We believe the results should be interesting for the management of and spending from funds like the Norwegian Government Fund Global, which motivated our study. Although our results may serve as a defense of its current regulations with a fixed equity share and (roughly) fixed withdrawal rates, our results suggest that risk taking is much too high. |
| JEL: | C61 E21 G11 |
| Date: | 2025–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:nst:samfok:20125 |
| By: | Francois, John Nana |
| Abstract: | I derive and estimate a structural consumption model for a panel of 34 sub-Saharan African countries from 19602018 to uncover three important aggregate consumption behaviours: habit formation, rule-of-thumb consumption, and the complementarity of government consumption in private utility. The following findings emerge: (1) There is evidence of habit formation in consumption. (2) Approximately 38% of consumers follow the rule of thumb of consuming their current income. This rule-of-thumb consumption behaviour in the data is driven by the period before the mobile POLICY BRIEF Habits, Rule-of-Thumb Consumption and Useful Public Consumption in sub-Saharan Africa: Theory and New Evidence John Nana Francois October 2023 / No.791 2 Policy Brief No.791 money era that emerged post-2000s. (3) Public consumption complements private consumption in an Edgeworth-Pareto sense. This suggests that increases in government consumption can stimulate aggregate demand via a positive marginal utility channel. |
| Date: | 2024–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:5e89275e-464f-4f25-8c6c-4d1b4db82ac6 |
| By: | Kıbrıs, Arzu (University of Warwick, Department of Politics and International Studies.); Cesur, Resul (University of Connecticut, IZA & NBER); Uler, Neslihan (University of Maryland and University of Michigan); Yıldırım, Sadullah (Marmara University) |
| Abstract: | This research identifies the causal impact of exposure to armed conflict on risk, ambiguity and time preferences and related field behaviors for the average male randomly picked from the population. Our study builds on a natural experiment, engendered by the mandatory conscription system and the long-running civil conflict in Turkey, with a survey design that measures preferences through lab-in-he-field-experiments. The setting we explore allows us to analyze the change in preferences without confoundment by community-level effects of conflict. Results show that conflict exposure increases risk tolerance, ambiguity neutrality, patience and time consistency. Tracing the effects on real life behaviors, we find that while conflict exposure leads to an increase in entrepreneurial activity, it has no significant impacts on risky health behaviors such as being overweight, smoking, or daily drinking. Evidence highlights post-traumatic growth in the form of elevated agency as a novel explanation for the observed changes in preferences. |
| Keywords: | Political Violence ; Artefactual Field Experiment ; Risk Preferences ; Ambiguity Preferences ; Time Preferences. JEL Codes: C90 ; C93 ; D01 ; D74 ; D81 ; I01 ; O17 ; Z13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wqapec:27 |
| By: | Michele Garagnani; Petra Schweinhardt; Philippe N. Tobler; Carlos Alos Ferrer |
| Abstract: | Numerical self-report scales are extensively used in economics, psychology, and even medicine to quantify subjective feelings, ranging from life satisfaction to the experience of pain. These scales are often criticized for lacking an objective foundation, and defended on the grounds of empirical performance. We focus on the case of pain measurement, where existing self-reported measures are the workhorse but known to be inaccurate and difficult to compare across individuals. We provide a new measure, inspired by standard economic elicitation methods, that quantifies the negative value of acute pain in monetary terms, making it comparable across individuals. In three preregistered studies, 330 healthy participants were randomly allocated to receive either only a high- or only a low-pain stimulus or a high-pain stimulus after having double-blindly received a topical analgesic or a placebo. In all three studies, the new measure greatly outperformed the existing self-report scales at distinguishing whether participants were in the more or the less painful condition, as confirmed by effect sizes, Bayesian factor analysis, and regression-based predictions. |
| Keywords: | Self-Reported Scales, Preference Elicitation, Pain |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:421926304 |
| By: | Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti |
| Abstract: | Weformalize two novel concepts of uncertainty in a model of imperfect and dispersed information: agreed and disagreed uncertainty. We show that consumer disagreement significantly shapes the effect of uncertainty on economic activity. Episodes of elevated uncertainty accompanied by high consumer disagreement (disagreed uncertainty) do not exert negative effects on economic activity. In contrast, episodes of high uncertainty with low consumer disagreement (agreed uncertainty) lead to substantial economic contractions. These results challenge the conventional view that uncertainty invariably triggers recessions. We establish these findings using both time-series and micro-survey panel methods. |
| Keywords: | Uncertainty, information frictions, disagreement, Bayesian vector autoregression (VAR), sign restrictions. |
| JEL: | E20 E32 E43 E52 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2025_01 |