Understanding time-inconsistent heterogeneous preferences in economics and finance: a practice theory approach

Published on Nov 1, 2019in Annals of Operations Research2.284
· DOI :10.1007/S10479-018-2836-9
Panagiotis Andrikopoulos6
Estimated H-index: 6
(Coventry University),
Nick Webber1
Estimated H-index: 1
(University of Birmingham)
This paper introduces an innovative framework for decision making by individuals with inconsistent preferences. Practices, associations of individuals with a preference set shared by its members, provide context and unify preferences across an economy so that decision-makers are situated in social and economic structures. Our framework models the time evolution of certain attributes, emerging from the practice framework, that govern individuals’ decisions and their intertemporal variation. A novel feature is that preferences are able to rank other preference sets without the need to aggregate them. Instead, the selection of a preference set is treated as a decision in its own right. Our framework explains decision making paradoxes such as the disposition effect and agency cost considerations that are frequently encountered in the behavioural finance and economics literature.
  • References (55)
  • Citations (2)
📖 Papers frequently viewed together
1 Author (Dino Borie)
78% of Scinapse members use related papers. After signing in, all features are FREE.
#1Özgür Evren (New Economic School)H-Index: 6
#2Stefania Minardi (HEC Paris)H-Index: 3
Warm-glow refers to other-serving behavior that is valuable for the actor per se, apart from its social implications. We provide axiomatic foundations for warm-glow by viewing it as a form of preference for larger choice sets driven by one's desire for freedom to act selfishly. Specifically, an individual who experiences warm-glow values the availability of selfish options even if she plans to act unselfishly. Our theory accommodates the empirical findings on motivation crowding out and provides...
13 CitationsSource
I incorporate expectations-based reference-dependent preferences into a dynamic stochastic model to explain three major life-cycle consumption facts; the intuitions behind these three implications constitute novel connections between recent advances in behavioral economics and prominent ideas in the macro consumption literature. First, expectations-based loss aversion rationalizes excess smoothness and sensitivity in consumption, the puzzling empirical observation of lagged consumption responses...
31 CitationsSource
#1Xiangyu Qu (University of Paris)H-Index: 1
Maximin expected utility model for individual decision making under ambiguity prescribes that the individual posits independently a utility function and a set of probability distributions over events to represent the values and belief, respectively. It assumes that individual evaluates each act on the basis of its minimum expected utility over this class of distributions. In this paper, we attempt to generalize the model to social decision making. It is assumed that the society’s belief is forme...
11 CitationsSource
#1Sam Yul Cho (OSU: Oregon State University)H-Index: 5
#2Jonathan D. Arthurs (OSU: Oregon State University)H-Index: 14
Last. Jeffrey Q. Barden (OSU: Oregon State University)H-Index: 8
view all 5 authors...
Research summary: This article draws on identity control theory and a study of acquisition premiums to explore how CEO celebrity status and financial performance relative to aspirations affect firm risk behavior. The study finds that celebrity CEOs tend to pay smaller premiums for target firms, but these tendencies change when prior firm performance deviates from the industry average returns, thereby leading these CEOs to pay higher premiums. The study also finds that the premiums tend to be eve...
18 CitationsSource
#1Murali Agastya (IIMB: Indian Institute of Management Bangalore)H-Index: 5
#2Arkadii Slinko (University of Auckland)H-Index: 20
We consider an environment in which a Decision Maker (DM) finds it sufficiently complex to even describe the state space, let alone guess the parameters of the underlying data generating process. He is therefore unable to use the standard Bayesian methods. Instead, at each moment in time, the DM constructs a preference relation on the set of available actions based on their past performance. We postulate a set of axioms on this family of preference relations indexed by histories (of rewards). Tw...
2 CitationsSource
#1Attila Ambrus (Duke University)H-Index: 16
#2Kareen Rozen (Yale University)H-Index: 8
This paper studies a class of multi-self decision-making models proposed in economics, psychology, and marketing. In this class, choices arise from the set-dependent aggregation of a collection of utility functions, where the aggregation procedure satisfies some simple properties. We propose a method for characterizing the extent of irrationality in a choice behavior, and use this measure to provide a lower bound on the set of choice behaviors that can be rationalized with n utility functions. U...
20 CitationsSource
#1Jerry R. GreenH-Index: 28
#2Daniel HojmanH-Index: 10
We consider a decision maker that holds multiple preferences simultaneously, each with different strengths described by a probability distribution. Faced with a subset of available alternatives, the preferences held by the individual can be in conflict. Choice results from an aggregation of these preferences. We assume that the aggregation method is monotonic: improvements in the position of alternative x cannot displace x if it were originally the choice. We show that choices made in this manne...
1 Citations
#1Eric Danan (Cergy-Pontoise University)H-Index: 6
#2Thibault Gajdos (AMU: Aix-Marseille University)H-Index: 14
Last. Jean-Marc Tallon (Pantheon-Sorbonne University)H-Index: 19
view all 4 authors...
We provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci and Siniscalchi (2011). We propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals' preferences over a pair of acts agree, then society should follow them. We characterize the resulting social preferences and show that it is enough that individuals share a prior to ...
3 CitationsSource
#1Andrew Lilley (USYD: University of Sydney)H-Index: 1
#2Robert Slonim (USYD: University of Sydney)H-Index: 23
This paper presents a model and experimental evidence to explain the "volunteering puzzle" where agents prefer volunteering time to donating money when monetary donations are, ceteris paribus, more efficient for providing resources to charity. In the model agents receive heterogeneous utility from pure and impure altruism (Andreoni 1989) that permits warm glow to vary between monetary donations and volunteering, thus allowing preferences for impure altruism to rationalize inefficient allocation ...
29 CitationsSource
#1Levon Barseghyan (Cornell University)H-Index: 9
#2Francesca Molinari (Cornell University)H-Index: 13
Last. Joshua C. Teitelbaum (Georgetown University)H-Index: 6
view all 4 authors...
We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions?characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes?play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed a...
156 CitationsSource
Cited By2
#1Diogo Ferreira de Lima Silva (UFPE: Federal University of Pernambuco)H-Index: 2
#2Luciano FerreiraH-Index: 4
Last. Adiel Teixeira de Almeida-Filho (UFPE: Federal University of Pernambuco)H-Index: 7
view all 3 authors...
Abstract This paper presents a new version of the TOPSIS method for sorting problems. The proposed method, called Preference Disaggregation on Technique for Order of Preference by Similarity to Ideal Solution - Sort (PDTOPSIS-Sort), is based on nonlinear programming for inferring parameters and uses expert's holistic evaluations. The existing TOPSIS-Sort method demands a significant number of parameters from the expert, including the definition of boundary profiles and weights. The proposed meth...
#1Jiangyuan Li (SUFE: Shanghai University of Finance and Economics)H-Index: 1
#1Jiangyuan Li (Singapore Management University)
Last. Zhentao Zou (WHU: Wuhan University)
view all 4 authors...
Abstract We extend the continuous-time hedge fund framework to model the dynamic leverage choice of a hedge fund manager with time-inconsistent preferences. While time-inconsistency discourages the manager from investing when facing high liquidation risk, the payment of incentive fees may induce a time-inconsistent manager to be more aggressive with leverage. For the special case with no management fees, we derive the closed-form solutions and find that a time-inconsistent manager always chooses...
2 CitationsSource