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Utility Theory
(Utility & Prospect & Decision Theories) (working papers mainly) See also Utility Theory metadata
Contents
(in new windows)
1. Utility Theory News 2. Utility Theory Reviews & Analyses 3. Utility Theory Items Events ( 2009 December November October September August July June May April March February January 2008 Undated 2007 Undated ) 4. Utility Theory Past, Timeless Events 5. Utility Theory Problems (St. Petersburg Paradox Allais Paradox Equity Premium Puzzle Risk Aversion Gains and Losses Loss Aversion Overweighting of low Probabilities Underweighting of high Probabilities "Four-Fold-Pattern" Shape of Probability Weighting Function Ellsberg Paradox Preference Reversals ) 6. New Approach. Principle of Uncertain Future 7. Solution of Utility Theory Problems (of St. Petersburg Paradox of Allais Paradox of Equity Premium Puzzle of Risk Aversion of Gains and Losses of Loss Aversion of Overweighting of low Probabilities of Underweighting of high Probabilities of "Four-Fold-Pattern" of Shape of Probability Weighting Function of Ellsberg Paradox of Preference Reversals )
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1. Utility Theory News
Ruptures in the probability scale? Calculation of ruptures’ dimensions Alexander Harin University Library of Munich, Germany Abstract Text Preferences estimation without approximation Alghalith Moawia University Library of Munich, Germany Abstract Text Some Considerations Regarding the Problem of Multidimensional Utility Martin Binder Friedrich-Schiller-University Jena, Max-Planck-Ins... Abstract Text Top
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2. Utility Theory Reviews & Analyses
Is There A Plausible Theory for Risky Decisions? James C. Cox, Vjollca Sadiraj, Bodo Vogt and Utteeyo Dasgupta Experimental Economics Center, Andrew Young School... 2007-06 Abstract Text Economists and uncertainty John Quiggin and Robert G. Chambers Risk and Sustainable Management Group, University ... 2005 Title Text Investigating Generalizations of Expected Utility Theory Using Experimental Data John Hey and Chris Orme Econometrica 1994 Abstract The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations Paul J H Schoemaker Journal of Economic Literature 1982 Title
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December
Ruptures in the probability scale? Calculation of ruptures’ dimensions Alexander Harin University Library of Munich, Germany Abstract Text Preferences estimation without approximation Alghalith Moawia University Library of Munich, Germany Abstract Text Some Considerations Regarding the Problem of Multidimensional Utility Martin Binder Friedrich-Schiller-University Jena, Max-Planck-Ins... Abstract Text The Illusion of Irrationality Krzysztof Kontek University Library of Munich, Germany Abstract Text Utility from Accumulation Louis Kaplow National Bureau of Economic Research, Inc Abstract Constructive Decision Theory Lawrence Blume, David Easley and Joseph Y. Halpern Institute for Advanced Studies Abstract Text Top
November
Indeterminacy and business-cycle fluctuations in a two-sector monetary economy with externalities Stefano Bosi, Kazuo Nishimura and Alain Venditti HAL Abstract Text Neo-additive capacities and updating Jurgen Eichberger, Simon Grant and Lefort, Jean-Philippe University of Heidelberg, Department of Economics Abstract Text Utility maximization in models with conditionally independent increments Jan Kallsen and Muhle-Karbe, Johannes arXiv.org Abstract Text Robust utility maximization for diffusion market model with misspecified coefficients R. Tevzadze and T. Toronjadze arXiv.org Abstract Text Top
October
Transitive Regret Sushil Bikhchandani and Uzi Segal Boston College Department of Economics Abstract Text Are CEOs Expected Utility Maximizers? John List and Charles Mason National Bureau of Economic Research, Inc Abstract Text A Note on Utility Maximization with Unbounded Random Endowment Keita Owari Institute of Economic Research, Hitotsubashi Unive... Abstract Text Intergenerational justice when future worlds are uncertain Humberto Llavador, John E. Roemer and Joaquim Silvestre Department of Economics and Business, Universitat ... Abstract Text Top
September
A Dynamic Ellsberg Urn Experiment Adam Dominiak, Peter Dursch and Lefort, Jean-Philippe University of Heidelberg, Department of Economics Abstract Text Absolute vs. Relative Notion of Wealth Changes Krzysztof Kontek University Library of Munich, Germany Abstract Text Consistent dynamic choice and non-expected utility preferences Andre Lapied and Pascal Toquebeuf HAL Abstract Text Top
August
Updating Choquet valuation and discounting information arrivals Andre Lapied and Robert Kast HAL Abstract Text Utility, games, and narratives Guido Fioretti University Library of Munich, Germany Abstract Text General Equilibrium without Utility Functions: How far to go? Yves Balasko and Mich Tvede University of Copenhagen. Department of Economics Abstract Text Top
July
Lottery valuation using the aspiration/relative utility function Krzysztof Kontek Department of Applied Econometrics, Warsaw School ... Abstract Text Utility functions, future consumption targets and subsistence thresholds Ashok Guha and Brishti Guha East Asian Bureau of Economic Research Abstract Text Top
June
General correcting formula of forecasting? Alexander Harin MPRA Paper Abstract Text Общая корректирующая формула прогнозирования General forecasting correcting formula Alexander Harin MPRA Paper Abstract Text An Algorithm for the Simulation of Bounded Rational Agents Stephan Schuster University Library of Munich, Germany Abstract Text Experienced Utility versus Decision Utility: Putting the 'S' in Satisfaction Steven Carter and Michael McBride University of California-Irvine, Department of Eco... Abstract Text Preference Elicitation under Oath Nicolas Jacquemet, Joule, Robert-Vincent, Stephane Luchini and Jason F. Shogren HAL Abstract Text Thermoeconomics Chapter 1 Introduction John Bryant Economic Consultancy, Vocat International Abstract Text Top
May
The Role of Role Uncertainty in Modified Dictator Games Nagore Iriberri and Pedro Rey-Biel Department of Economics and Business, Universitat ... Abstract Text A new solution to the Purchasing Power Parity puzzles: Risk-aversion, exchange rate uncertainty and the Law of One Price Michael Arghyrou, Andros Gregoriou and Panayiotis M. Pourpourides Cardiff University, Cardiff Business School, Econo... Abstract Text Different methods to define utility functions yield different results and engage different neural processes Marcus Heldmann, Bodo Vogt, Heinze, Hans-Jochen and Thomas Munte Otto-von-Guericke University Magdeburg, Faculty of... Abstract Text Top
April
Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions Audrey Hu, Steven A. Matthews and Liang Zou Penn Institute for Economic Research, Department o... Abstract Text Risk Aversion and Expected Utility of Consumption over Time Johansson-Stenman, Olof Goteborg University, Department of Economics Abstract Text Top
March
Social Preferences under Risk - An Experimental Analysis Christiane Bradler Friedrich-Schiller-University Jena, Max-Planck-Ins... Abstract Text Choice deferral and ambiguity aversion Igor Kopylov Theoretical Economics Abstract Text Reference Points and Effort Provision Johannes Abeler, Armin Falk, Lorenz Gotte and David Huffman C.E.P.R. Discussion Papers Abstract Text Gender Differences in Risk Aversion and Ambiguity Lex Borghans, Bart Golsteyn, James Heckman and Huub Meijers Geary Institute, University College Dublin Abstract Text Top
February
A Likelihood Analysis of Models with Information Frictions Leonardo Melosi PIER Working Paper Archive Abstract Text Bounding the CRRA Utility Functions Richard M. H. Suen MPRA Paper Abstract Text The implications of incorrect utility function specification for welfare measurement in choice experiments Cati Torres, Nick Hanley and Antoni Riera Stirling Economics Discussion Papers Abstract Text Foundations of Continuous-time Recrusive Utility: Differentiability and Normalization of Certainty Equivalents Holger Kraft and Frank Seifried Department of Finance, Goethe University Frankfurt... Abstract Text Top
January
Relating the two Dimensions of Risk Attitudes: An Experimental Analysis Jianying Qiu and Eva-Maria Steiger Friedrich-Schiller-University Jena, Max-Planck-Ins... Abstract Text Politicians: Be Killed or Survive Bruno S. Frey and Benno Torgler School of Economics and Finance, Queensland Univer... Abstract Text Self Control, Risk Aversion, and the Allais Paradox Drew Fudenberg and David K Levine UCLA Department of Economics Title Text A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings Roman Frydman, Michael D. Goldberg, Soren Johansen and Katarina Juselius School of Economics and Management, University of ... Abstract Text Top
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2008 Undated
Fuzzy interval net present value Marco Corazza and Silvio Giove Department of Applied Mathematics, University of V... Abstract Text Realization Utility Nicholas C. Barberis and Wei Xiong National Bureau of Economic Research, Inc Abstract Text Subjective expected utility in games Alfredo Di Tillio Theoretical Economics Abstract Text Consistency and the core for fuzzy non-transferable-utility games Yu-Hsien Liao Economics Bulletin Abstract Text Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment Andrea Morone Economics Bulletin Abstract Text A general theory of time discounting: The reference-time theory of intertemporal choice Ali al-Nowaihi and Sanjit Dhami Department of Economics, University of Leicester Abstract Text Strotz meets Allais: Diminishing Impatience and the Certainty Effect Yoram Halevy Microeconomics.ca Website Title Text Ellsberg Revisited: an Experimental Study Yoram Halevy Microeconomics.ca Website Title Text Manipulating Reference States: the Effect of Attitudes on Utility Astrid Matthey Friedrich-Schiller-University Jena, Max-Planck-Ins... Title Text Calibration Results for Non-Expected Utility Theories Zvi Safra and Uzi Segal Boston College Department of Economics Title Text Facts, Norms and Expected Utility Functions Sophie Jallais, Pradier, Pierre-Charles and David Teira HAL Title Text Solution of the Ellsberg paradox by means of the principle of uncertain future Alexander Harin University Library of Munich, Germany Title Text The Descriptive and Predictive Adequacy of Theories of Decision Making Under Uncertainty/Ambiguity John Hey, Gianna Lotito and Anna Maffioletti Department of Economics, University of York Title Text Non Utility Maximizing Behaviour: Probabilistic Choice in a Budget Set “Box”. Properties of Expected Demand Functions Larsson, Lars-Goran Goteborg University, Department of Economics Title Text Towards a Characterization of Rational Expectations Itai Arieli UCLA Department of Economics Title Text Utility-Based Utility David Cass Penn Institute for Economic Research, Department o... Abstract Text Parametric Weighting Functions Enrico Diecidue, Ulrich Schmidt and Horst Zank Kiel Institute for the World Economy Abstract Text Top
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2007 Undated
Testing Guilt Aversion Tore Ellingsen, Magnus Johannesson, Sigve Tjotta and Gaute Torsvik Stockholm School of Economics Abstract Text SHOULD THE UTILITY FUNCTION BE DITCHED? Dominique, C-Rene University Library of Munich, Germany Abstract Text Share the Gain, Share the Pain? Almost Transferable Utility, Changes in Production Possibilities, and Bargaining Solutions Elisabeth Gugl Department of Economics, University of Victoria Abstract Text Non-Monotonicity of the Tversky-Kahneman Probability-Weighting Function: a Cautionary Note JONATHAN E. INGERSOLL JR. Jr. Yale School of Management, International Center for Finance Abstract+Text On Behavioral Complementarity and its Implications Christopher P. Chambers, Federico Echenique and Eran Shmaya Documentos de Trabajo (working papers) Abstract Text Принцип неопределенного будущего и его применения А. Харин СОЦИОНЕТ About: A Solution of the Ellsberg Paradox by means of the Principle of Uncertain Future. Аннотация Текст Probabilities in Economic Modeling Itzhak Gilboa, Andrew Postlewaite and David Schmeidler UCLA Department of Economics Title Text Exponential Spectral Risk Measures Kevin Dowd and John Cotter Working Paper Series Abstract + Text Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size Fehr-Duda, Helga, Adrian Bruhin, Thomas F. Epper and Renate Schubert University of Zurich, Socioeconomic Institute Abstract Text Is There A Plausible Theory for Risky Decisions? James C. Cox, Vjollca Sadiraj, Bodo Vogt and Utteeyo Dasgupta Experimental Economics Center, Andrew Young School... Abstract Text Statistics of Risk Aversion Enzo Giacomini and Wolfgang Karl H?rdle Humboldt University, Collaborative Research Center... Abstract Text Why Kill Politicians? A Rational Choice Analysis of Political Assassinations Bruno S. Frey Center for Research in Economics, Management and t... Abstract Text Mixture Models of Choice Under Risk Anna Conte, John Hey and Peter Grant Moffatt Department of Economics, University of York Abstract Text Delay aversion Efe A. Ok and Benoit, Jean-Pierre Theoretical Economics Abstract Text Should National Happiness be Maximized? Bruno S. Frey and Alois Stutzer Center for Research in Economics, Management and t... Abstract Text An economic index of riskiness Robert J. Aumann and Roberto Serrano Instituto Madrile?o de Estudios Avanzados (IMDEA) ... Abstract Text Principle of uncertain future and utility Alexander Harin University Library of Munich, Germany Abstract Text Noise and Bias in Eliciting Preferences John Hey, Andrea Morone and Ulrich Schmidt Department of Economics, University of York Abstract Text Top
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Utility Theory
Events 4. Past, Timeless Anomalies: Utility Maximization and Experienced Utility Daniel Kahneman and Richard H. Thaler Journal of Economic Perspectives 2006 Abstract Text of the corresponding Working Paper Investigating Generalizations of Expected Utility Theory Using Experimental Data John Hey and Chris Orme Econometrica 1994 Abstract Prospect Theory: An Analysis of Decision under Risk Daniel Kahneman and Amos Tversky Econometrica 1979 Title Risk, Ambiguity, and the Savage Axioms Daniel Ellsberg The Quarterly Journal of Economics 1961 Abstract Le comportement de l'homme rationnel devant le risque: critique des postulats et axiomes de l'Ecole Americaine Maurice Allais Econometrica 1953 Title Theory of Games and Economic Behavior John von Neumann and Oskar Morgenstern Princeton University Press 1944 Table of contents Text (txt 1.6 MB) Text (pdf 33 MB) An Introduction to the Principles of Morals and Legislation Jeremy Bentham The Online Library of Liberty 1823 Contents Text Exposition of a New Theory on the Measurement of Risk Daniel Bernoulli Commentarii Academiae Scientiarum Imperialis Petropolitanae 1738 Title Top
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5. Utility Theory Problems & Paradoxes
(more)
The Allais paradox (modified)
Suppose Mr. Somebody offers you a choice of only one of the following: A guaranteed gain of $99. Or A lottery: The gain of $100 with the probability P(preliminary) = 99% or $0 with the (preliminary) probability 1%. The mathematical expectations of guarantee and lottery outcomes are exactly the same. But people chose the guaranteed gain instead of the lottery. Top
Gains and Losses
Compare two experiments: 1) Mr. Somebody offers you a choice of only one of the following: A guaranteed gain of $99. Or A lottery: The gain of $100 with the probability P(preliminary) = 99% or $0 with the (preliminary) probability 1%. 2) Mr. Somebody offers you a choice of only one of the following: A guaranteed loss of $99. Or A lottery: The loss of $100 with the probability P(preliminary) = 99% or $0 with the (preliminary) probability 1%. The mathematical expectations of the guarantee and lottery outcomes are exactly the same in both experiments. But in similar experiments, the overwhelming majority of people chose: - in the case of gains - the guaranteed gain instead of the lottery one. - in the case of losses - the lottery loss instead of the guaranteed one. The possible well-known "natural and clear explanation" of gains in the Allais paradox by means of risk aversion cannot supply any uniform explanation for both gains and losses. The result of this explanation is gains' risk aversion and losses' risk seeking. Top
Overweighting of low Probabilities
Suppose Mr. Somebody offers you a choice of only one of the following: A guaranteed gain of $1. Or A lottery: The gain of $100 with the probability P(preliminary) = 1% or $0 with the (preliminary) probability 1%. The mathematical expectations of guarantee and lottery outcomes are exactly the same. But the well-determined experimental fact is: in similar experiments the obvious majority of people chose the lottery instead of the guaranteed gain.
Four-Fold-Pattern
The well-determined facts are: For positive (gains) risky prospects, people typically 1) overweight low probabilities but 2) underweight high probabilities. For negative (losses) risky prospects, people typically 3) underweight low probabilities but 4) overweight high probabilities. Top
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6. New Approach
(more)
The idea of the approach
Particular consideration of (hidden) uncertainties (noises, fluctuations, measurements' errors, imprecision, etc.)
Principle of Uncertain Future
(simplified as much as possible)
The principle
The probability of a future event contains uncertainty.
6.1. The first consequence of the principle
Suppose we plan to test the probability value, which is equal to 99%. Suppose the probability uncertainty value is equal to 5%. Then, evidently, the real mean value of probability cannot be as high as 99%. Generally, High probabilities will decrease.
Phigh real < Phigh planned
Analogously, but considering the second consequence of the principle (see below),
Low probabilities can increase.
Plow real possible > Plow planned
6.2. The second consequence of the principle
The total probability of unforeseen future events is more than 0%
Σ Punforeseen real > 0%
Hence,
The present total probability of future events is less than 100%
Σ Pplanned < 100%
or
The present probability system of future events is incomplete. Top
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7. Solution of Utility Theory Problems
(more)
The strongest qualitative test is the 4-Fold-Pattern.
Solution & Explanation
of the Four-Fold-Pattern (simplified as much as possible) The well-determined facts are: For positive (gains) risky prospects, people typically 1) overweight low probabilities but 2) underweight high probabilities. For negative (losses) risky prospects, people typically 3) underweight low probabilities but 4) overweight high probabilities. Denoting the real value of probability, which value is near 100% as Phigh real , the (positive) value of gain as G and the (negative) value of loss as -G , we obtain
Phigh real < Phigh planned
and
G * Phigh real < G * Phigh planned
-G * Phigh real > -G * Phigh planned
2) the underweight of high probabilities gains and 4) the overweight of high probabilities losses. Denoting the real value of probability, which value is near 0% as Plow real possible we obtain
Plow real possible > Plow planned
and
G * Plow real possible > G * Plow planned
-G * Plow real possible < -G * Plow planned
1) the overweight of low probabilities gains and 3) the underweight of low probabilities losses. Thus, the above facts can be explained naturally and uniformly. Top
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