Expected Utility Research Articles

A behavioral decomposition of willingness to pay for health insurance

Despite widespread exposure to substantial medical expenditure risk in low-income populations, health insurance enrollment is typically low. This is puzzling from the perspective of expected utility theory. To help explain it, this paper introduces a decomposition of the stated willingness to pay (WTP) for insurance into its fair price and three behavioral deviations from that price due to risk perception and risk attitude consistent with prospect theory, plus a residual. To apply this approach, we elicit WTP, subjective distributions of medical expenditures and risk attitude (utility curvature and probability weighting) from Filipino households in a nationwide survey. We find that the mean stated WTP of the uninsured is less than both the actuarially fair price and the subsidized price at which public insurance is offered. This is not explained by downwardly biased beliefs: both the mean and the median subjective expectation are greater than the subsidized price. Convex utility in the domain of losses pushes mean WTP below the fair price and the subsidized price, and the transformation of probabilities into decision weights depresses the mean further, at least using one of two specific decompositions. WTP is reduced further by factors other than risk perception and attitude.

Decision-making dynamic evolution among groups regarding express packaging waste recycling under different reference dependence and information policy.

The reveal of express packaging waste recycling behavior evolution trend is crucial to waste management. Current models are mostly based on the classic expected utility theory, without considering groups are susceptible to internal and external factors. To address this drawback, we construct an evolutionary game model of express packaging waste recycling behavior by considering information policy and reference dependence factors to explore groups' decision-making with different initial adoption rates. A system dynamics simulation model based on survey data is then built, and simulation experiments are also designed to reveal the impacts of key factors on the evolution path of recycling behavior. The results show that, without information policy, groups cyclically oscillate around the initial state. The stable trend depends on the information intensity, and the information effect is marginal diminishing. Groups with a lower initial adoption rate will evolve to an ideal stable strategy only when information intensity exceeds the threshold of ten. Reference points can change behavior strategies and are characterized by significant loss aversion. The benefits and costs affect groups' adoption or rejection behaviors. These findings can provide new ideas for related research and offer a reference for the government to formulate efficient waste management policies.

Output Feedback Synthesis of Multiagent Systems With Jointly Connected Switching Networks: A Separation Principle Approach

The article presents distributed output feedback synthesis for both leaderless consensus and leader-follower consensus of linear multiagent systems subject to jointly connected switching networks. Luenberger type distributed observers are proposed based on the neighborhood output estimation error, and distributed output feedback controllers are developed according to the certainty equivalence principle. To show uniform global exponential stability of the switched closed-loop system, a separation principle for a class of switched linear systems with a cascaded structure is established employing weak Lyapunov function and checking weak zero-state detectability of its “diagonal” switched subsystems. It is shown that the weak zero-state detectability can be guaranteed by a generalized uniformly jointly connected condition of switching networks without any dwell-time constraints.

Teachers’ Perception Towards Transfer of School Heads and Its Effect on Students’ Performance in Public Secondary Schools in Nyeri County, Kenya

Transfer of school heads has been one of the major concerns in the educational sector whereby the concerned authority always formulates and implements policies that will ensure students meet the set standards for quality education. The purpose of the study was to establish teachers’ perceptions towards the transfer of school heads and their effects on students’ performance. The study is guided by expected utility theory and adopted a descriptive survey design. The target population was 2995 teachers, where a sample of 121 teachers was selected using a simple random sampling technique. The findings of the study reveal that teachers’ perception towards the transfer of school heads had a positive and significant effect on student performance. The study recommends that the Teachers service commission should develop a program aimed at creating awareness to teachers on the importance of transfer of school heads. The program should focus on changing teachers’ perceptions towards school heads transfer, which was found to significantly influence student academic performance.

Model Predictive Operation Control of Islanded Microgrids under Nonlinear Conversion Losses of Storage Units

This paper proposes a certainty equivalence model predictive control (MPC) approach for the operation of islanded microgrids with a very high share of renewable energy sources. First, to make the MG model more realistic, the conversion losses of the storage units and the conversion losses of the power electronic devices are considered by the quadratic functions in the dynamic of units. Then, to mitigate the effect of errors in the storage units’ state of charge prediction, the conversion loss functions are reformulated by the mixed-integer linear inequality functions and included in the proposed scheme. Finally, the effectiveness of the proposed certainty MPC is verified by a numerical case study.

A multiplayer game model to detect insiders in wireless sensor networks.

Insiders might have incentives and objectives opposed to those of the belonging organization. It is hard to detect them because of their privileges that partially protect them. In Wireless Sensor Networks (WSNs), significant security issues arise, including compromised nodes by insiders that disrupt the normal network operation. Immediate defensive actions to isolate malicious nodes would mitigate any related impacts. A multiplayer game model is proposed as a solution to the problem of insider attacks in WSNs, the Game of Wireless Sensor Networks (GoWiSeN). It is an imperfect information game, formulated with the use of non-cooperative game theory, holding the assumption that all players are rational. The model consists of several Local Intrusion Detection Systems (LIDSs), which are located to different nodes and communicate with a Global Intrusion Detection System (GIDS). Each LIDS gives suggestions whether the monitoring node is trusted or not. The game is being played between a potential attacker, the nodes and the GIDS. The GIDS is responsible for making a final decision and for isolating a compromised node in case of an internal attack. The theoretical model represents these interactions in an extensive form game. The formal elements of the game are specified, the outcomes of the game are quantified by first specifying players’ preferences, and then, by using the von Neumann-Morgenstern utility function, and payoffs are obtained. The game is constructed and solved, by locating NE in pure and mixed strategies. Experimental evaluations conducted on real network datasets, using IDSs of different capabilities, simulate special cases and compromised nodes in a WSN, verify the model efficiency, and show how the game should be played.

Vaccination and altruism under the COVID-19 pandemic

ObjectivesThe goal of this study is to examine the role of altruism and sensitivity to public shame in individuals’ willingness to pay for a COVID-19 vaccine. Study designWe apply expected utility theory to predict the role of individuals’ altruism and public shame in the willingness to pay for vaccines. Subsequently, we test the prediction by using a unique cross-sectional survey. MethodsWe use online survey data collected from those aged 30–49 in Japan between June 18th and 25th, 2020 (n = 1686). The selection of respondents follows quota sampling with regard to age group, gender, and prefecture of residence. We employ an ordinary least square (OLS) model to regress respondents’ willingness to pay for a hypothetically-effective vaccine for COVID-19 on binary indicators of altruism and sensitivity to public shame, as well as socio-demographic characteristics. ResultsThe willingness to pay for the vaccine is higher among those with stronger altruistic concerns and sensitivity to shaming. ConclusionVoluntary vaccinations may be inefficient, because the uptake of vaccines could be low for selfish individuals who often violate social distancing requirements. To improve the efficiency of vaccine uptake, some interventions, such as nudges and a vaccine passport, may be needed.

Four Internal Inconsistencies in Tversky and Kahneman’s (1992) Cumulative Prospect Theory Article: A Case Study in Ambiguous Theoretical Scope and Ambiguous Parsimony

Scholars heavily rely on theoretical scope as a tool to challenge existing theory. We advocate that scientific discovery could be accelerated if far more effort were invested into also overtly specifying and painstakingly delineating the intended purview of any proposed new theory at the time of its inception. As a case study, we consider Tversky and Kahneman (1992). They motivated their Nobel-Prize-winning cumulative prospect theory with evidence that in each of two studies, roughly half of the participants violated independence, a property required by expected utility theory (EUT). Yet even at the time of inception, new theories may reveal signs of their own limited scope. For example, we show that Tversky and Kahneman’s findings in their own test of loss aversion provide evidence that at least half of their participants violated their theory, in turn, in that study. We highlight a combination of conflicting findings in the original article that make it ambiguous to evaluate both cumulative prospect theory’s scope and its parsimony on the authors’ own evidence. The Tversky and Kahneman article is illustrative of a social and behavioral research culture in which theoretical scope plays an extremely asymmetric role: to call existing theory into question and motivate surrogate proposals.

Inferring Robustness of Implementations of Probabilistic (Formulations of) Expected Utility Theory: Some Standard Conditions

Inferring Robustness of Implementations of Probabilistic (Formulations of) Expected Utility Theory: Some Standard Conditions

The extended perturbation method: With applications to the New Keynesian model and the zero lower bound

We introduce the extended perturbation method, which improves the accuracy of standard perturbation by reducing approximation errors under certainty equivalence. For the New Keynesian model with Calvo pricing, extended perturbation is more accurate than standard perturbation, which implies explosive dynamics because it omits the upper bound on inflation implied by this model. In contrast, extended perturbation enforces this bound and generates stable dynamics. We also show that extended perturbation can accurately solve a New Keynesian model that enforces the zero lower bound for the monetary policy rate by considering a smooth nonlinear modification of the standard Taylor rule.

Nash Bargaining with Certainty Equivalents

Nash Bargaining with Certainty Equivalents

“Welcome to the fairytale world…”: Belief, Play, and Semantic Shifts in Contemporary Religious Culture

Researchers of contemporary culture still discuss the significance of the gap between “historical” and “fictional” (or “invented”) religions, “serious” and “playful” emotions felt by their followers, and the very understanding of reality informing respective ontologies. It is important, however, that every newly appeared religious community have to either employ existing models of social and ritual relations or create them anew or borrow them from other — sometimes very distant — contexts. From this perspective, history of post-Soviet religious culture can provide us with certain insights into social and moral expectations and anxieties characteristic to the citizens of the former USSR in the time of collapse of Soviet “symbolic universe.” The article deals with certain concepts of social and moral imagination borrowed from the late Soviet culture and being especially important for the Last Testament Church, a post-Soviet religious movement. Such borrowings imply more or less significant semantic shifts, but at the same time retain partly erased “trains” of previous meanings. This allows reconstructing with certain precision cultural and social needs that inform “invention” of new religions. The analysis presented in the article demonstrates that social utopia of the Last Testament Church proceeds from concepts and images of late Soviet childhood where literary and cinematographic fairy tales and pedagogic ethics were easily connected to the image of nuclear apocalypse and survival in the world burnt and poisoned by radiation.

Ethics and Law.

Ethics and Law.

It's Stochastic Dominance and Probabilistic Expected Utility Theory, Silly: Loss Aversion (a Concave Risk Premium Function) is Necessary Condition for Rationality of Risk Seeking Preferences

It's Stochastic Dominance and Probabilistic Expected Utility Theory, Silly: Loss Aversion (a Concave Risk Premium Function) is Necessary Condition for Rationality of Risk Seeking Preferences

Universal Adaptive Control of Nonlinear Systems

This letter develops a new direct adaptive control framework that extends the certainty equivalence principle to general nonlinear systems with unmatched model uncertainties. The approach adjusts the rate of adaptation online to eliminate the effects of parameter estimation transients on stability. The method can be immediately combined with a previously designed or learned feedback policy if a corresponding model-parameterized Lyapunov function or contraction metric is known. Simulation results of various nonlinear systems with unmatched uncertainties illustrate the approach.

Dynamic optimization problems for mean-field stochastic large-population systems

This paper considers dynamic optimization problems for a class of control average meanfield stochastic large-population systems. For each agent, the state system is governed by a linear mean-field stochastic differential equation with individual noise and common noise, and the weight coefficients in the corresponding cost functional can be indefinite. The decentralized optimal strategies are characterized by stochastic Hamiltonian system, which turns out to be an algebra equation and a mean-field forward-backward stochastic differential equation. Applying the decoupling method, the feedback representation of decentralized optimal strategies is further obtained through two Riccati equations. The solvability of stochastic Hamiltonian system and Riccati equations under indefinite condition is also derived. The explicit structure of the control average limit and the related mean-field Nash certainty equivalence equation systems are discussed by some separation techniques. Moreover, the decentralized optimal strategies are proved to satisfy the approximate Nash equilibrium property. The good performance of the proposed theoretical results is illustrated by a practical example from the engineering field.

A Reverse Expected Shortfall Optimization Formula

The celebrated Expected Shortfall (ES) optimization formula implies that ES at a fixed probability level is the minimum of a linear real function plus a scaled mean excess function. We establish a reverse ES optimization formula, which says that a mean excess function at any fixed threshold is the maximum of an ES curve minus a linear function. Despite being a simple result, this formula reveals elegant symmetries between the mean excess function and the ES curve, as well as their optimizers. The reverse ES optimization formula is closely related to the Fenchel-Legendre transforms, and our formulas are generalized from ES to optimized certainty equivalents, a popular class of convex risk measures. We analyze worst-case values of the mean excess function under two popular settings of model uncertainty to illustrate the usefulness of the reverse ES optimization formula, and this is further demonstrated with an application using insurance datasets.

Source Recursive Expected Utility on Rich Mixture Sets

Source Recursive Expected Utility on Rich Mixture Sets

Excerpts From the Development of Methods of Legal Interpretation

Legal interpretation is a stage in the application of the law, an indispensable operation whereby a judge (or other decision-maker) determines what a legal text means. The text does not stand alone; the words and expressions used in the norm may themselves have multiple meanings even in the context of everyday terminology, not to mention the differences between legal and other professional meanings. Furthermore, a norm has not only a text but also a context, a regulatory environment, a declared legislative purpose, an intention by the lawmaker or a set of moral expectations within which the text can be interpreted, etc. This paper attempts to present how methods of legal interpretation have evolved over the last two centuries and how we have moved from Savigny’s Canon to the sophisticated methodologies of today. At the end of the paper, we ourselves will attempt to provide a useful methodological classification of these highly fragmented and diffuse methods.

Design & Pricing of Islamic Asset-Based S. ukuk¯ Strips: An Endeavour towards Financial Development

Purpose: The efficiency of the Islamic Financial Industry suffers from a lack of liquidity instruments and shallow secondary markets. This paper reviews the financial intermediation theory and the complementary role of debt and money markets towards the broader goal of allocative efficiency, asset transformation, and diversification for the welfare of all economic agents. Separately Tradable Registered Interest & Principle (STRIPs), created by disintegrating coupon and principal payment to be traded as discount bonds, have been effectively employed in the west for liquidity management. This paper proposes a novel idea of ij¯arah s.uk¯uk STRIPS (ISS) that splits the payoffs of ij¯arah s.uk¯uk. Method: The design and pricing of ISS are modeled employing lease valuation, certainty equivalent (C.E.), and bootstrapping. Instead of the prevalent capital asset-pricing model, volatility of ij¯arah s.uk¯uk payoffs is modeled using certainty equivalents, which extend the analysis to micro-level investor utility function. Also, the viability of ISS design is substantiated by numerical illustrations. Findings: We found that the proposed ISS can serve as a short-term liquidity management instrument, facilitate price discovery and define the term structure in Islamic debt markets. For sovereign issues, ISS can enable efficient monetary policy transmission, market completeness, and public finances for the underdeveloped Muslim world. Significance: To the best of our knowledge, this is the first study proposing the ISS as a financial innovation. The ISS proposed in this study will be a valuable addition to the arsenal of Islamic Financial offerings - augmenting the financial deepening and development of Islamic Financial Markets.