Reasons and Means to Model Preferences as Incomplete

Literature involving preferences of artificial agents or human beings often assume their preferences can be represented using a complete transitive binary relation. Much has been written however on different models of preferences. We review some of the reasons that have been put forward to justify more complex modeling, and review some of the techniques that have been proposed to obtain models of such preferences

Ambiguity seeking as a result of the status quo bias

Several factors affect attitudes toward ambiguity. What happens, however, when people are asked to exchange an ambiguous alternative in their possession for an unambiguous one? We present three experiments in which individuals preferred to retain the former. This status quo bias emerged both within- and between-subjects, with and without incentives, with different outcome distributions, and with endowments determined by both the experimenter and the participants themselves. Findings emphasize the need to account for the frames of reference under which evaluations of probabilistic information take place as well as modifications that should be incorporated into descriptive models of decision making.Ambiguity, risk, status quo bias, decision making, uncertainty, Leex

GPs' preferences: What price fee-for-service?

In mixed health care systems a crucial condition for the success of Managed Care (MC) plans is to win over a su±cient number of general practitioners (GPs) acting as gatekeepers. This contribution reports on GPs' willingness-to-accept (WTA) or compensation asked, respectively, for changing from conventional fee-for-service to MC practice. Some 175 Swiss GPs participated in discrete choice experiments which permit to put a money value on their status quo bias. Regardless of whether effects coding or dummy coding is used to measure status quo bias, Swiss GPs require at least 16 percent of their current average income to give up fee-for-service in favor of MC practice.general practitioners, willingness-to-pay, preferences, market experiments, managed care, effects coding, status quo bias

Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment

In this paper, preferences for income redistribution in Switzerland are elicited through a Discrete Choice Experiment (DCE) performed in 2008. In addition to the amount of redistribution as a share of GDP, attributes also included its uses (working poor, the unemployed, old-age pensioners, families with children, people in ill health) and nationality of beneficiary (Swiss, Western European, others). Willingness to pay for redistribution increases with income and education, contradicting the conventional Meltzer-Richard (1981) model. The Prospect of Upward Mobility hypothesis [Hirschman and Rothschild (1973); Benabou and Ok (2001)] receives partial empirical support.Income redistribution, preferences, willingness to pay, discrete choice experiments, stated choice, economic well-being, social mobility

A Literacy Review of The Prospect Theory: Why Has It Been Revolutionary and How It Has Changed the Way We Conceptualize Decision-Making Under Risk

To conclude, in this paper we discussed, in great detail, the revolutional axioms presented by Daniel Kahneman and Amos Tversky in 1979, namely the prospect theory. Prospect theory has forever changed the way we conseptualize the decision-making process under risk. The theory itself is divided into two separate phases; editing and evaluation phase. The most prominent part of the editing phase is coding, in which, decision makers change the meaning of, e.g., monetary sums of money, to more easily approachable form; gains and losses. This has been one of the biggest conceptual insights of this theory. However, as we established before, to review events in the light of gains and losses, they need to be in reference to something. In prospect theory, this was named as a reference point. The problem with coding (gains and losses) and the reference point is that, in the real-life applications, it has been unclear what a gain or loss represents in any given situation. This challenge remains unsolved. Addressing it is a key-challenge for the future of the prospect theory and its real-life applications. On top of this, prospect theorems strong suit has been the weighting function, which demonstrates the way in which decision makers over and undervalues mathematical probabilities. In figure 2, this is truly brilliantly demonstrated. This finding is to a great extent used in the field of, e.g., insurance since the uncertainty is an inherent part of the industry. The weighting function does also question the expected utility theorems axiom about a rational decision maker, because it shows how, even when decision makers are greatly exposed to the true mathematical probability, the anomalies of over and underweighting still occurs. Anomalies emerging from the evaluation of a prospect were greatly also noted by the value function. In the value function, it was demonstrated through empirical evidence, how decision makers were constantly feeling more pain (pleasure), from losing (gaining) an exactly equivalent monetary sum of money. In more conservative models, e.g., the expected utility theorem, this contradiction would be not possible. These emerged anomalies were truly hard to fathom within the economists and were, therefore, criticised extensively. The experiments were conducted multiple times, each time with more like real-life situations for the decisions made under risk. Even though the best efforts, these anomalies stayed. Because of this truly strong empirical evidence, the prospect theory is today widely recognized. The applications of this the prospect theory have been the most vital in the areas of finance and insurance since they are, in essence, concerned with situations involving uncertainty. This is why in these fields the prospect theory have naturally had a stronger foothold and also the framework has been adapted to the academic reasoning as well. In fact, this theorem has been an inherent part of the formulation in the field we today call behavioural economics. One of the first foot steps were made in that direction by Kahneman and Tversky and soon after by Thaler. In other fields, the theory itself has proven to be truly difficult to be modelled into a given situation at hand. There have been plenty of practical problems, one of which have to do in regard to the definition of the reference point. Despite this, during this millennium, successful attempts have been made and, therefore, the prospect theory has been more widely utilized. Thus, in the near future, we might be able to model the prospect theory to fit a larger range of applications. To conclude, the failure to endogenize all of the relevant variables at this stage of the prospect theory is a limitation of the theory but not a fatal flaw. Therefore, “we should see it as an opportunity to improve the theory rather than as a reason to reject it” (Rat Choice 1997). On top of that, the expected utility theorem is based on a normatively pleasing set of axioms, where as the prospect theory is mainly descriptive model, which has yielded inexplicable solid empirical evidence supporting this descriptive way of reasoning. When all this is taken into account, prospect theory has been a revolutionary descriptive model and even though it faces challenges in the real life applications, the potential behind the prospect theory is enormous

A Model of Reference-Dependent Preferences

We develop a model that fleshes out, extends, and modifies existing models of reference dependent preferences and loss aversion while accommodating most of the evidence motivating these models. Our approach makes reference-dependent theory more broadly applicable by avoiding some of the ways that prevailing models if applied literally and without ancillary assumptions make variously weak and incorrect predictions. Our model combines the reference-dependent gain-loss utility with standard economic 'consumption utility' and clarifies the relationship between the two. Most importantly, we posit that a person's reference point is her recent expectations about outcomes (rather than the status quo), and assume that behavior accords to a personal equilibrium: The person maximizes utility given her rational expectations about outcomes, where these expectations depend on her own anticipated behavior. We apply our theory to consumer behavior, and emphasize that a consumer's willingness to pay for a good is endogenously determined by the market distribution of prices and how she expects to respond to these prices. Because a buyer's willingness to buy depends on whether she anticipates buying the good, for a range of market prices there are multiple personal equilibria. This multiplicity disappears when the consumer is sufficiently uncertain about the price she will face. Because paying more than she anticipated induces a sense of loss in the buyer, the lower the prices at which she expects to buy the lower will be her willingness to pay. In some situations, a known stochastic decrease in prices can even lower the quantity demanded.

Essays on the Political Economy of Taxation

In this dissertation we analyze the role of parties’ electoral competition in aggregating voters’ preferences over policy and its impact on tax design. The representation of voters’ interests is central for the analysis of public finance since the issue of aggregation is closely linked to the tradeoff between efficiency and redistribution, and the size and composition of public spending. Parties’ aggregation of preferences is related to the mechanism in which policy makers (parties) weigh the relative merits of competing goals of the tax system (in our analysis, redistribution versus efficiency), and reveals the welfare calculus throughout parties identify groups of individuals who might be beneficiated (hurt) by policy changes. In the first essay we analyze the influence of voters in modifying tax policy through tax initiatives. In this essay we argue that the process of aggregation of preferences between the competition for votes in a representative democracy and the majority rule are different. This, in turn, might lead to the approval of a tax rate limit (TRL) initiative. We argue that the rationale for a TRL proposal is to substitute feasible tax structures rather than to constrain the government’s power to collect taxes. In addition, we provide a model that predicts the tax structure that would arise as a result of a TRL The second essay addresses the role of voters’ partisan attitudes in the determination of fiscal policies. We argue that partisan attitudes and its distribution across the electorate influence the proportion of the expected votes that different coalitions deliver in the election. We identify conditions in which voters’ partisan attitudes affect the provision of a public good and the redistributive properties of the tax structure. The third essay extends our previous analysis of the impact of voters’ partisan attitudes on tax design by incorporating parties that are policy motivated. In this setting, the relative merits of efficiency versus redistribution in designing the tax system are determined by the process of aggregation of voters’ preferences and parties’ preferences over policy. The conflict between parties and the electorate’s preferences over tax policy depends on voters’ partisan attitudes. In particular, voters’ party affiliation soft parties’ electoral constraints, allowing parties to advance the interests of their constituents. The model predicts that redistribution (efficiency) will play a more prominent role for a party that represents a coalition of low (high) income individuals with a high (low) taste for public goods