A model of stochastic choice from lists

We study stochastic choice from lists. All lists present the same set of alternatives albeit in different orders. Faced with a list, the decision maker makes her choice in two stages. In the first stage she searches through the list till she sees $k$ alternatives. In the second stage she chooses from the alternatives she has seen. Both $k$ and the choice rule governing her second stage behavior are random. We show that the underlying primitives of our model are revealed by the decision maker’s choice frequencies from lists. We characterize the model and two of its special cases. In the first special case the decision maker deterministically chooses the best observed alternative according to a given preference. In the second, the decision maker maximizes random preferences.     

Intertemporal choice with different short-term and long-term discount factors

This paper proposes a new axiomatic model of intertemporal choice that allows for dynamic inconsistency. We weaken the classical assumption of stationarity into two related axioms: stationarity in the short-term and stationarity in the long-term. We obtain a model with two independent discount factors, which is flexible enough to capture different time preferences, including a greater impatience for more immediate outcomes (when a long-term discount factor exceeds a compounded short-term discount factor). Our proposed model can accommodate some experimental results that cannot be rationalized by other existing models of dynamic inconsistency (such as quasi-hyperbolic discounting and generalized hyperbolic discounting).     

Cardinal versus ordinal criteria in choice under risk with disconnected utility ranges

This paper provides a formal justification for the existence of subjective random components intrinsic to the outcome evaluation process of decision makers and explicitly assumed in the stochastic choice literature. We introduce the concepts of admissible error function and generalized certainty equivalent, which allow us to analyze two different criteria, a cardinal and an ordinal one, when defining suitable approximations to expected utility values. Contrary to the standard literature requirements for irrational preferences, adjustment errors arise in a natural way within our setting, their existence following directly from the disconnectedness of the range of the utility functions. Conditions for the existence of minimal errors are also studied. Our results imply that neither the cardinal nor the ordinal criterion do necessarily provide the same evaluation for two or more different prospects with the same expected utility value. As a consequence, a rational decision maker may define two different generalized certainty equivalents when presented with the same prospect in two different occasions.     

Non-stationary additive utility and time consistency

Within a continuous time life cycle model of consumption and savings, I study the properties of the most general class of additive intertemporal utility functionals. They are not necessarily stationary, and do not necessarily multiplicatively separate a discount factor from “per-period utility”. I prove rigorously that time consistency holds if and only if the per-period felicity function is multiplicatively separable in $t$, the date of decision and in $s$, the date of consumption, or equivalently, if the Fisherian instantaneous subjective discount rate does not depend on $t$. The model allows to explain “anomalies in intertemporal choice” even when the agents are time consistent and various empirical regularities. On the other hand, the model allows to characterize mathematically the “effective consumption profile” of naive, time-inconsistent agents.     

Similarity-based mistakes in choice

We characterize the following choice procedure. The decision maker is endowed with two binary relations over alternatives, a preference and a similarity. In every choice problem she includes in her choice set all alternatives which are similar to the best feasible alternative. Hence she can, by mistake, choose an inferior option because it is similar to the best. We characterize this boundedly rational behavior by suitably weakening the rationalizability axiom of Arrow (1959). We also characterize a variation where the decision maker chooses alternatives on the basis of their similarities to attractive yet infeasible options. We show that similarity-based mistakes of either kind lead to cyclical behavior. Finally, we reinterpret our procedure as a method for choosing a bundle given a set of individual items, in which the decision maker combines the best feasible item with those that complement it.     

Hazard rate,stochastic choice and consideration sets

Manzini and Mariotti (2014) define the menu-independent random consideration set rule, where the decision maker considers each alternative with a menu-independent probability known as the attention function. We relax the assumption of menu-independence and allow for any restriction to be imposed on the attention function. We show that there is an equivalence between the attention function and the hazard rate. This equivalence is used to characterize the menu dependent random consideration set rules that correspond to (i) specific conditions on the probability rule, and (ii) different stochastic choice models from the literature.     

Inter-temporal preference for flexibility and risky choice

We derive an inter-temporal theory of choice, in the spirit of Kreps and Porteus [Kreps, D.M., Porteus, E.L., 1978. Temporal resolution of uncertainty and dynamic choice theory. Econometrica 46, 185–200], where decision makers have incomplete preferences. This can be used to model indecisiveness as well as unforeseen contingencies. The key to our approach is a time consistency condition and therefore the normative connection between ex-ante and ex-post choice. The time consistency condition enables a representation that is a straight forward extension of recursive utility with the exception that it features an inter-temporal ‘utility for flexibility’.     

Axiomatization of weighted (separable) utility

Nontrivial decision problems typically involve a trade-off among multiple attributes of choice options. One simple way of resolving such trade-offs is to aggregate multiple attributes into one real-valued index, known as weighted or separable utility. Applications of weighted utility can be found in choice under risk (expected utility) and uncertainty (subjective expected utility), intertemporal choice (discounted utility) and welfare economics (utilitarian social welfare function). This paper presents an alternative behavioral characterization (preference axiomatization) of weighted utility. It is shown that necessary and sufficient conditions for weighted utility are completeness, continuity, bi-separable transitivity (and transitivity if none of the attributes is null, or inessential).     

A theory of time preferences over risky outcomes

This paper provides two representation theorems for time preferences. They both cover as special cases a variety of time preference models considered in the experimental and theoretical literatures on intertemporal choice. In particular, similarity relations on time and outcomes, exponential, quasi-hyperbolic and hyperbolic discounting are special cases of the theorems. This approach identifies certain factors that are common to time preference structures which look so different.The paper builds on the recent work by Masatlioglu and Ok [Masatlioglu, Y., Ok, E., 2008. A theory of (relative) discounting. Journal of Economic Theory, in press] on Euclidean bundles and obtains similar representation theorems for the case of compact, separable and connected spaces of bundles. My work allows for the inclusion of the case in which bundles are lotteries.     

Ellsberg’s two-color experiment,portfolio inertia and ambiguity

Results in this paper relate the observation of an interval of prices at which a decision maker (DM) strictly prefers to hold a zero position on an asset (termed “portfolio inertia”) to the DM’s perception of the underlying payoff relevant events as ambiguous, as the term is defined in [Econometrica 69 (2001) 265]. The connection between portfolio inertia and ambiguity is established without invoking a parametric preference form, such as the Choquet expected utility or the max–min multiple priors model. This allows us to draw an observable distinction between portfolio inertia that may arise purely due to first-order risk aversion type effects, such as those which could arise even if preferences were probabilistically sophisticated, and portfolio inertia that involves ambiguity perceptions.     

Dynamic portfolio choice under ambiguity and regime switching mean returns

I examine a continuous-time intertemporal consumption and portfolio choice problem under ambiguity, where expected returns of a risky asset follow a hidden Markov chain. Investors with Chen and Epstein's (2002) recursive multiple priors utility possess a set of priors for unobservable investment opportunities. The optimal consumption and portfolio policies are explicitly characterized in terms of the Malliavin derivatives and stochastic integrals. When the model is calibrated to U.S. stock market data, I find that continuous Bayesian revisions under incomplete information generate ambiguity-driven hedging demands that mitigate intertemporal hedging demands. In addition, ambiguity aversion magnifies the importance of hedging demands in the optimal portfolio policies. Out-of-sample experiments demonstrate the economic importance of accounting for ambiguity.     

Context dependent beliefs

This paper examines a model where the set of available outcomes from which a decision maker must choose alters his perception of uncertainty. Specifically, this paper proposes a set of axioms such that each menu induces a subjective belief over an objective state space. The decision maker’s preferences are dependent on the realization of the state. The resulting representation is analogous to state-dependent expected utility within each menu; the beliefs are menu dependent and the utility index is not. Under the interpretation that a menu acts as an informative signal regarding the true state, the paper examines the behavioral restrictions that coincide with different signal structures: elemental (where each element of a menu is a conditionally independent signal) and partitional (where the induced beliefs form a partition of the state space).     

Randomly evolving tastes and delayed commitment

We consider a decision maker with randomly evolving tastes who faces dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice that features uncertain consumption utilities, which evolve according to a subjective Markov process. The parameters of the representation, which are the subjective Markov process governing the evolution of utilities, and the discount factor, are uniquely identified from behavior. We relate the correlation of tastes over time and the desire to delay commitment to future consumption.     

Consumption paths under prospect utility in an optimal growth model

This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.     

Competitive equilibrium cycles with endogenous labor

In this paper, we study a two-sector optimal growth model with elastic labor supply. We show that the modified golden rule is saddle-point stable when the investment good is capital intensive. To characterize stability with a capital intensive consumption good, we focus on either additively separable or homothetic preferences. In the first specification, we show that optimal oscillations require the elasticity of intertemporal substitution in consumption to be high enough while the elasticity of labor needs to be low enough. At the same time, we prove that with a linear utility in leisure the modified golden rule is always saddle-point stable. In the second specification for preferences, we show that the local dynamic properties of the optimal path depend instead on the shares of consumption and leisure into total utility. We prove that endogenous fluctuations are even more likely with homothetic preferences.     

Price uncertainty, saving, and welfare

We analyze how commodity price uncertainty affects saving behavior and welfare in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles ordinal preferences, attitudes towards risk, and attitudes towards intertemporal substitution. We show that the effect of price uncertainty on savings boils down to knowing (1) hf degree of resistance to intertemporal substitution and (2) the effect that uncertainty has on the certainty-equivalent real interest rate. We also show that, if the certainty-equivalent real interest rate is lower with uncertainty, consumers' welfare is also lower.     

Weakened WARP and top-cycle choice rules

We propose the following weakened version of WARP: if the decision maker selects an alternative x and rejects another alternative y in some context, he cannot select y and reject x in another context. This axiom is consistent with cyclic choices. It is necessary and sufficient for the choice from every subset A of a (finite) universal set X to coincide with the weak upper-contour set of the transitive closure of some fixed complete relation at some alternative in A. Adding further simple axioms forces the choice from each subset to coincide with the top cycle (in that subset) of some fixed tournament over the universal set.     

Decision making with imprecise probabilistic information

We develop an axiomatic approach to decision under uncertainty that explicitly takes into account the information available to the decision maker. The information is described by a set of priors and a reference prior. We define a notion of imprecision for this informational setting and show that a decision maker who is averse to information imprecision maximizes the minimum expected utility computed with respect to a subset of the set of initially given priors. The extent to which this set is reduced can be seen as a measure of imprecision aversion. This approach thus allows a lot of flexibility in modelling the decision maker attitude towards imprecision. In contrast, applying Gilboa and Schmeidler [J. Math. Econ. 18 (1989) 141] maxmin criterion to the initial set of priors amounts to assuming extreme pessimism.     

Characterization of stationary preferences in a continuous time framework

We characterize preference relations on continuous time consumption paths which admit an exponential discounting representation. We provide two theorems as such, one in the cardinal framework and another in the ordinal framework. Our characterizations parallel the known characterizations in discrete time framework. In the cardinal framework, we adopt the axioms of Epstein (1983), which characterize a stationary preference relation in discrete time, and obtain the exponential discounting model as a special case of the discounting model proposed by Uzawa (1968). In the ordinal framework, we adopt the axioms of Bleichrodt et al. (2008) which were proposed to generalize Koopmans’ classical characterization of stationary preferences.     

Interview design for revealing preferences of policy makers

A policy maker is asked a few simple questions about his preference. Then the model represents it by a quadratic utility function, which can be made monotonic and quasi-concave (= to provide the convexity of the preference). The design of the interview with a policy maker is aimed at attaining the following goals: (a) no ambiguous output (= degeneration of the model), (b) ordinal approach to preferences (= asking questions about ordinal preferences and providing the uniqueness of the ordinal preference at the model output, regardless of its representation by a quadratic utility function), (c) stability of the model (= the model's input–output transformation is continuous). We also describe briefly the implementation of our model in a user-friendly interface to a corresponding computer program.