The Target-Based Utility Model. The role of Copulas and of Non-Additive Measures

My studies and my Ph.D. thesis deal with topics that recently emerged in the field of decisions under risk and uncertainty. In particular, I deal with the "target-based approach" to utility theory. A rich literature has been devoted in the last decade to this approach to economic decisions: originally, interest had been focused on the "single-attribute" case and, more recently, extensions to "multi-attribute" case have been studied. This literature is still growing, with a main focus on applied aspects. I will, on the contrary, focus attention on some aspects of theoretical type, related with the multi-attribute case. Various mathematical concepts, such as non-additive measures, aggregation functions, multivariate probability distributions, and notions of stochastic dependence emerge in the formulation and the analysis of target-based models. Notions in the field of non-additive measures and aggregation functions are quite common in the modern economic literature. They have been used to go beyond the classical principle of maximization of expected utility in decision theory. These notions, furthermore, are used in game theory and multi-criteria decision aid. Along my work, on the contrary, I show how non-additive measures and aggregation functions emerge in a natural way in the frame of the target-based approach to classical utility theory, when considering the multi-attribute case. Furthermore they combine with the analysis of multivariate probability distributions and with concepts of stochastic dependence. The concept of copula also constitutes a very important tool for this work, mainly for two purposes. The first one is linked to the analysis of target-based utilities, the other one is in the comparison between classical stochastic order and the concept of "stochastic precedence". This topic finds its application in statistics as well as in the study of Markov Models linked to waiting times to occurrences of words in random sampling of letters from an alphabet. In this work I give a generalization of the concept of stochastic precedence and we discuss its properties on the basis of properties of the connecting copulas of the variables. Along this work I also trace connections to reliability theory, whose aim is studying the lifetime of a system through the analysis of the lifetime of its components. The target-based model finds an application in representing the behavior of the whole system by means of the interaction of its components

The Target-Based Utility Model. The role of Copulas and of Non-Additive Measures

My studies and my Ph.D. thesis deal with topics that recently emerged in the field of decisions under risk and uncertainty. In particular, I deal with the "target-based approach" to utility theory. A rich literature has been devoted in the last decade to this approach to economic decisions: originally, interest had been focused on the "single-attribute" case and, more recently, extensions to "multi-attribute" case have been studied. This literature is still growing, with a main focus on applied aspects. I will, on the contrary, focus attention on some aspects of theoretical type, related with the multi-attribute case. Various mathematical concepts, such as non-additive measures, aggregation functions, multivariate probability distributions, and notions of stochastic dependence emerge in the formulation and the analysis of target-based models. Notions in the field of non-additive measures and aggregation functions are quite common in the modern economic literature. They have been used to go beyond the classical principle of maximization of expected utility in decision theory. These notions, furthermore, are used in game theory and multi-criteria decision aid. Along my work, on the contrary, I show how non-additive measures and aggregation functions emerge in a natural way in the frame of the target-based approach to classical utility theory, when considering the multi-attribute case. Furthermore they combine with the analysis of multivariate probability distributions and with concepts of stochastic dependence. The concept of copula also constitutes a very important tool for this work, mainly for two purposes. The first one is linked to the analysis of target-based utilities, the other one is in the comparison between classical stochastic order and the concept of "stochastic precedence". This topic finds its application in statistics as well as in the study of Markov Models linked to waiting times to occurrences of words in random sampling of letters from an alphabet. In this work I give a generalization of the concept of stochastic precedence and we discuss its properties on the basis of properties of the connecting copulas of the variables. Along this work I also trace connections to reliability theory, whose aim is studying the lifetime of a system through the analysis of the lifetime of its components. The target-based model finds an application in representing the behavior of the whole system by means of the interaction of its components

Monads, partial evaluations, and rewriting

Monads can be interpreted as encoding formal expressions, or formal operations in the sense of universal algebra. We give a construction which formalizes the idea of "evaluating an expression partially": for example, "2+3" can be obtained as a partial evaluation of "2+2+1". This construction can be given for any monad, and it is linked to the famous bar construction, of which it gives an operational interpretation: the bar construction induces a simplicial set, and its 1-cells are partial evaluations. We study the properties of partial evaluations for general monads. We prove that whenever the monad is weakly cartesian, partial evaluations can be composed via the usual Kan filler property of simplicial sets, of which we give an interpretation in terms of substitution of terms. In terms of rewritings, partial evaluations give an abstract reduction system which is reflexive, confluent, and transitive whenever the monad is weakly cartesian. For the case of probability monads, partial evaluations correspond to what probabilists call conditional expectation of random variables. This manuscript is part of a work in progress on a general rewriting interpretation of the bar construction.Comment: Originally written for the ACT Adjoint School 2019. To appear in Proceedings of MFPS 202

An overview of economic applications of David Schmeidler`s models of decision making under uncertainty

This paper surveys some economic applications of the decision theoretic framework pioneered by David Schmeidler to model effects of ambiguity. We have organized the discussion principally around three themes: financial markets, contractual arrangements and game theory. The first section discusses papers that have contributed to a better understanding of financial market outcomes based on ambiguity aversion. The second section focusses on contractual arrangements and is divided into two sub-sections. The first sub-section reports research on optimal risk sharing arrangements, while in the second sub-section, discusses research on incentive contracts. The third section concentrates on strategic interaction and reviews several papers that have extended different game theoretic solution concepts to settings with ambiguity averse players. A final section deals with several contributions which while not dealing with ambiguity per se, are linked at a formal level, in terms of the pure mathematical structures involved, with Schmeidler`s models of decision making under ambiguity. These contributions involve issues such as, inequality measurement, intertemporal decision making and multi-attribute choice.Ellsberg Paradox, Ambiguity aversion, Uncertainty aversion

Ambiguity and uncertainty in Ellsberg and Shackle

This paper argues that Ellsberg’s and Shackle’s frameworks for discussing the limits of the (subjective) probabilistic approach to decision theory are not as different as they may appear. To stress the common elements in their theories Keynes’s Treatise on Probability provides an essential starting point. Keynes’s rejection of well-defined probability functions, and of maximisation as a guide to human conduct, is shown to imply a reconsideration of what probability theory can encompass, that is in the same vein of Ellsberg’s and Shackle’s concern in the years of the consolidation of Savage’s new probabilistic mainstream. The parallel between Keynes and the two decision theorists is drawn by means of a particular assessment of Shackle’s theory of decision, namely, it is interpreted in the light of Ellsberg’s doctoral dissertation. In this thesis, published only as late as 2001, Ellsberg developed the details and devised the philosophical background of his criticism of Savage as first put forward in the famed 1961 QJE article. The paper discusses the grounds on which the ambiguity surrounding the decision maker in Ellsberg’s urn experiment can be deemed analogous to the uncertainty faced by Shackle’s entrepreneur taking “unique decisions.” The paper argues also that the insights at the basis of the work of both Shackle and Ellsberg, as well as the criteria for decision under uncertainty they put forward, are relevant to understand the development of modern decision theory.uncertainty, weight of argument, non-additive probability

Unambiguous events and dynamic Choquet preferences.

This paper explores the relationship between dynamic consistency and existing notions of unambiguous events for Choquet expected utility preferences. A decision maker is faced with an information structure represented by a filtration. We show that the decision maker’s preferences respect dynamic consistency on a fixed filtration if and only if the last stage of the filtration is composed of unambiguous events in the sense of Nehring (Math Social Sci 38:197–213, 1999). Adopting two axioms, conditional certainty equivalence consistency and constrained dynamic consistency to filtration measurable acts, it is shown that the decision maker respects these two axioms on a fixed filtration if and only if the last stage of the filtration is made up of unambiguous events in the sense of Zhang (Econ Theory 20:159–181, 2002).Choquet expected utility; Unambiguous events; Filtration; Updating; Dynamic consistency; Consequentialism;

Optimism and Pessimism in Games.

This paper considers the impact of ambiguity in strategic situations. It extends the earlier literature by allowing for optimistic responses to ambiguity. Ambiguity is modelled by CEU preferences. We study comparative statics of changes in ambiguity-attitude in games with strategic complements or substitutes. This gives a precise statement of the impact of ambiguity on economic behaviour. We also the possibility that players may be overconfident in the sense of over-estimating the probability of favourable outcomes. This has a similar effect of increasing equilibrium strategies in games of strategic complements, Finally we consider RDEU preferences.Ambiguity in games, overcon?fidence, strategic complementarity, optimism, RDEU.

Probabilistically Sophisticated Multiple Priors.

We characterize the intersection of the probabilistically sophisticated and multiple prior models. We show this class is strictly larger than the subjective expected utility model and that its elements can be generated from a generalized class of the -contaminated priors, which we dub the - contaminated/ -truncated prior.subjective probability, maximin expected utility, epsilon-contamined priors.