Research

Working Papers

Disappointment, Risk Aversion and Dynamic Depletion of Self-Control

Abstract: Research in psychology and neuroscience provides compelling evidence that negative emotions hinder individuals' ability to exert self-control. Similarly, a growing body of empirical research in economics suggests that poverty can induce negative emotional states, which generate behaviours that perpetuate it. This paper introduces a history-dependent model of dynamic choice in which the decision maker experiences more stringent internal conflicts when emotionally distressed, but who is otherwise a completely standard economic agent. From a decision-theoretic perspective, the way we incorporate emotions necessitates relaxing the von Neumann-Morgenstern independence axiom and introducing revised versions of classical axioms of dynamic choice. In terms of choice behaviour, our agent doesn't only dislike risk by her pure risk aversion, but also because it can deplete self-control in subsequent choices. This will lead agents to avoid temptations dynamically: even when not tempted, they will like to abstain from contingencies that cause emotional distress, and hence normatively inferior future choices. Similarly, our agent's risk attitude will depend on the availability of future temptations, and we identify a disappointment premium that individuals will demand to accept risks, which is always non-negative irrespective of the agent's underlying intrinsic risk preference.

🏆 Best presentation award 1st Verona Early Career Workshop in Economics 2024

Prerationality in Decision Trees with Timed Menu Consequences (joint with Peter J. Hammond)

Abstract: This paper extends previous work on consequentialist decision theory to allow for consequences to accrue at intermediate, non-terminal nodes, implying that each path through a decision tree is mapped to a unique intertemporal consequence stream. By formally linking earlier concepts of consequentialism, prerationality and normal form invariance, we draw on results from Hammond (1988b, 2022) to prove that behaviour is suitably continuous and prerational if and only if there exists an underlying base preference relation that is Bayesian-rational, with a Bernoulli utility index defined over consequence streams. We also permit intermediate consequences to be menu consequences, defined to be a function of the set of consequences that are feasible in the continuation subtree whose initial node is the consequence node. We illustrate how the inclusion of menu consequences enables the prerationalization of a plethora of prima facie “non-consequentialist” behaviour, such as violations of the weak axiom of revealed preference, the independence axiom of expected utility, and “menu effects” such as temptation and regret, among other applications.

Partition-Dependent Expected Utility (joint with Nicole Scholz)

In this paper, we study choice under objective risk where the primitive is enriched to include an exogenous equivalence relation on the space of lotteries. We seek conditions on this enlarged primitive, ensuring the existence of an expected utility representation in which the Bernoulli utility index may depend on the partition generated by the equivalence relation. We term this model the Partition Dependent Expected Utility (PDEU) and show examples of recent choice models in the literature on non-expected utility that fall into this class. We prove representation theorems characterizing PDEU preferences when the partition generates convex cells, and under different continuity assumptions. Our theorems address partitions with both countable and uncountable elements, with cells that can be lower-dimensional, fully dimensional, or a combination of both. We show that for fully dimensional cells, the parameters of the representation are suitably unique, but this is not the case for lower-dimensional cells. We conclude with a discussion of the technical challenges that may arise when studying partitions with non-convex cells.

A Frequentist Approach to Revealed Preference Analysis (joint with Charles Gauthier and Raghav Malhotra)

Abstract: Classically, testing whether decision makers belong to specific preference classes involves two main approaches. The first, known as the functional approach, assumes access to an entire demand function. The second, the revealed preference approach, constructs inequalities to test finite demand data. This paper bridges these methods by using the functional approach to test finite data through preference learnability results. We develop a computationally efficient al- gorithm that generates tests for choice data based on functional characterizations of preference families. We provide these restrictions for various applications, in- cluding homothetic and weakly separable preferences, where the latter’s revealed preference characterization is provably NP-Hard. We also address choice under uncertainty, offering tests for betweenness preferences. Lastly, we perform a sim- ulation exercise demonstrating that our tests are effective in finite samples and accurately reject demands not belonging to a specified class.

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