Mas-Colell, Whinston and Green Versus Scitovsky on Profit and Utility Maximization

I contrast the theoretical foundation of profit maximization of Mas-Colell, Whinston and Green’s “Microeconomics” against that provided by Scitovsky in a paper of 1943. Whereas Mas-Colell, Whinston and Green try to show that profit maximization can be derived from utility maximization, Scitovsky categorically states the contrary view. I argue, first, that the foundation provided by Mas-Colell, Whinston and Green is not sound and, secondly, that Scitovsky’s line of reasoning opens a better way to model business behavior.

The Relationship between Risk and Expected Return in Europe

Revised: 2006-07

Expected Fair Allocation in Farsighted Network Formation

I consider cooperation situations where players have network relations. Networks evolve according to a stationary transition probability matrix and at each moment in time players receive payoffs from a stationary allocation rule. Players discount the future by a common factor. The pair formed by an allocation rule and a transition probability matrix is called expected fair if for every link in the network both participants gain, marginally, and in discounted, expected terms, the same from it; and it is called a pairwise network formation procedure if the probability that a link is created (or eliminated) is positive if the discounted, expected gains to its two participants are positive too. The main result is the existence, for the discount factor small enough, of an expected fair and pairwise network formation procedure where the allocation rule is component balanced, meaning it distributes the total value of any maximal connected subnetwork among its participants. This existence result holds for all discount factors when the pairwise network formation procedure is restricted. I finally provide some comparison with previous models of farsighted network formation.

NOx emission and thermal efficiency of a 300 MWe utility boiler retrofitted by air staging

Full-scale experiments were performed on a 300 MWe utility boiler retrofitted with air staging. In order to improve boiler thermal efficiency and to reduce NOx emission, the influencing factors including the overall excessive air ratio, the secondary air distribution pattern, the damper openings of CCOFA and SOFA, and pulverized coal fineness were investigated. Through comprehensive combustion adjustment, NOx emission decreased 182 ppm (NOx reduction efficiency was 44%), and boiler heat efficiency merely decreased 0.21%. After combustion improvement, high efficiency and low NOx emission was achieved in the utility coal-fired boiler retrofitted with air staging, and the unburned carbon in ash can maintain at a desired level where the utilization of fly-ash as byproducts was not influenced.

Voting games with incomplete information

We examine voting situations in which individuals have incomplete information over each others' true preferences. In many respects, this work is motivated by a desire to provide a more complete understanding of so-called probabilistic voting.

Chapter 2 examines the similarities and differences between the incentives faced by politicians who seek to maximize expected vote share, expected plurality, or probability of victory in single member: single vote, simple plurality electoral systems. We find that, in general, the candidates' optimal policies in such an electoral system vary greatly depending on their objective function. We provide several examples, as well as a genericity result which states that almost all such electoral systems (with respect to the distributions of voter behavior) will exhibit different incentives for candidates who seek to maximize expected vote share and those who seek to maximize probability of victory.

In Chapter 3, we adopt a random utility maximizing framework in which individuals' preferences are subject to action-specific exogenous shocks. We show that Nash equilibria exist in voting games possessing such an information structure and in which voters and candidates are each aware that every voter's preferences are subject to such shocks. A special case of our framework is that in which voters are playing a Quantal Response Equilibrium (McKelvey and Palfrey (1995), (1998)). We then examine candidate competition in such games and show that, for sufficiently large electorates, regardless of the dimensionality of the policy space or the number of candidates, there exists a strict equilibrium at the social welfare optimum (i.e., the point which maximizes the sum of voters' utility functions). In two candidate contests we find that this equilibrium is unique.

Finally, in Chapter 4, we attempt the first steps towards a theory of equilibrium in games possessing both continuous action spaces and action-specific preference shocks. Our notion of equilibrium, Variational Response Equilibrium, is shown to exist in all games with continuous payoff functions. We discuss the similarities and differences between this notion of equilibrium and the notion of Quantal Response Equilibrium and offer possible extensions of our framework.

Efficient methods for empirical tests of behavioral economics theories in laboratory and field experiments

In the quest for a descriptive theory of decision-making, the rational actor model in economics imposes rather unrealistic expectations and abilities on human decision makers. The further we move from idealized scenarios, such as perfectly competitive markets, and ambitiously extend the reach of the theory to describe everyday decision making situations, the less sense these assumptions make. Behavioural economics has instead proposed models based on assumptions that are more psychologically realistic, with the aim of gaining more precision and descriptive power. Increased psychological realism, however, comes at the cost of a greater number of parameters and model complexity. Now there are a plethora of models, based on different assumptions, applicable in differing contextual settings, and selecting the right model to use tends to be an ad-hoc process. In this thesis, we develop optimal experimental design methods and evaluate different behavioral theories against evidence from lab and field experiments.

We look at evidence from controlled laboratory experiments. Subjects are presented with choices between monetary gambles or lotteries. Different decision-making theories evaluate the choices differently and would make distinct predictions about the subjects' choices. Theories whose predictions are inconsistent with the actual choices can be systematically eliminated. Behavioural theories can have multiple parameters requiring complex experimental designs with a very large number of possible choice tests. This imposes computational and economic constraints on using classical experimental design methods. We develop a methodology of adaptive tests: Bayesian Rapid Optimal Adaptive Designs (BROAD) that sequentially chooses the "most informative" test at each stage, and based on the response updates its posterior beliefs over the theories, which informs the next most informative test to run. BROAD utilizes the Equivalent Class Edge Cutting (EC²) criteria to select tests. We prove that the EC² criteria is adaptively submodular, which allows us to prove theoretical guarantees against the Bayes-optimal testing sequence even in the presence of noisy responses. In simulated ground-truth experiments, we find that the EC² criteria recovers the true hypotheses with significantly fewer tests than more widely used criteria such as Information Gain and Generalized Binary Search. We show, theoretically as well as experimentally, that surprisingly these popular criteria can perform poorly in the presence of noise, or subject errors. Furthermore, we use the adaptive submodular property of EC² to implement an accelerated greedy version of BROAD which leads to orders of magnitude speedup over other methods.

We use BROAD to perform two experiments. First, we compare the main classes of theories for decision-making under risk, namely: expected value, prospect theory, constant relative risk aversion (CRRA) and moments models. Subjects are given an initial endowment, and sequentially presented choices between two lotteries, with the possibility of losses. The lotteries are selected using BROAD, and 57 subjects from Caltech and UCLA are incentivized by randomly realizing one of the lotteries chosen. Aggregate posterior probabilities over the theories show limited evidence in favour of CRRA and moments' models. Classifying the subjects into types showed that most subjects are described by prospect theory, followed by expected value. Adaptive experimental design raises the possibility that subjects could engage in strategic manipulation, i.e. subjects could mask their true preferences and choose differently in order to obtain more favourable tests in later rounds thereby increasing their payoffs. We pay close attention to this problem; strategic manipulation is ruled out since it is infeasible in practice, and also since we do not find any signatures of it in our data.

In the second experiment, we compare the main theories of time preference: exponential discounting, hyperbolic discounting, "present bias" models: quasi-hyperbolic (α, β) discounting and fixed cost discounting, and generalized-hyperbolic discounting. 40 subjects from UCLA were given choices between 2 options: a smaller but more immediate payoff versus a larger but later payoff. We found very limited evidence for present bias models and hyperbolic discounting, and most subjects were classified as generalized hyperbolic discounting types, followed by exponential discounting.

In these models the passage of time is linear. We instead consider a psychological model where the perception of time is subjective. We prove that when the biological (subjective) time is positively dependent, it gives rise to hyperbolic discounting and temporal choice inconsistency.

We also test the predictions of behavioral theories in the "wild". We pay attention to prospect theory, which emerged as the dominant theory in our lab experiments of risky choice. Loss aversion and reference dependence predicts that consumers will behave in a uniquely distinct way than the standard rational model predicts. Specifically, loss aversion predicts that when an item is being offered at a discount, the demand for it will be greater than that explained by its price elasticity. Even more importantly, when the item is no longer discounted, demand for its close substitute would increase excessively. We tested this prediction using a discrete choice model with loss-averse utility function on data from a large eCommerce retailer. Not only did we identify loss aversion, but we also found that the effect decreased with consumers' experience. We outline the policy implications that consumer loss aversion entails, and strategies for competitive pricing.

In future work, BROAD can be widely applicable for testing different behavioural models, e.g. in social preference and game theory, and in different contextual settings. Additional measurements beyond choice data, including biological measurements such as skin conductance, can be used to more rapidly eliminate hypothesis and speed up model comparison. Discrete choice models also provide a framework for testing behavioural models with field data, and encourage combined lab-field experiments.

Economía de la salud, modalidades de evaluación económica

La salud es un aspecto muy importante en la vida de cualquier persona, de forma que, al ocurrir cualquier contingencia que merma el estado de salud de un individuo o grupo de personas, se debe valorar estrictamente y en detalle las distintas alternativas destinadas a combatir la enfermedad. Esto se debe a que, la calidad de vida de los pacientes variará dependiendo de la alternativa elegida. La calidad de vida relacionada con la salud (CVRS) se entiende como el valor asignado a la duración de la vida, modificado por la oportunidad social, la percepción, el estado funcional y la disminución provocadas por una enfermedad, accidente, tratamiento o política (Sacristán et al, 1995). Para determinar el valor numérico asignado a la CVRS, ante una intervención, debemos beber de la teoría económica aplicada a las evaluaciones sanitarias para nuevas intervenciones. Entre los métodos de evaluación económica sanitaria, el método coste-utilidad emplea como utilidad, los años de vida ajustado por calidad (AVAC), que consiste, por un lado, tener en cuenta la calidad de vida ante una intervención médica, y por otro lado, los años estimados a vivir tras la intervención. Para determinar la calidad de vida, se emplea técnicas como el Juego Estándar, la Equivalencia Temporal y la Escala de Categoría. Estas técnicas nos proporcionan un valor numérico entre 0 y 1, siendo 0 el peor estado y 1 el estado perfecto de salud. Al entrevistar a un paciente a cerca de la utilidad en términos de salud, puede haber riesgo o incertidumbre en la pregunta planteada. En tal caso, se aplica el Juego Estándar con el fin de determinar el valor numérico de la utilidad o calidad de vida del paciente ante un tratamiento dado. Para obtener este valor, al paciente se le plantean dos escenarios: en primer lugar, un estado de salud con probabilidad de morir y de sobrevivir, y en segundo lugar, un estado de certeza. La utilidad se determina modificando la probabilidad de morir hasta llegar a la probabilidad que muestra la indiferencia del individuo entre el estado de riesgo y el estado de certeza. De forma similar, tenemos la equivalencia temporal, cuya aplicación resulta más fácil que el juego estándar ya que valora en un eje de ordenadas y abscisas, el valor de la salud y el tiempo a cumplir en esa situación ante un tratamiento sanitario, de forma que, se llega al valor correspondiente a la calidad de vida variando el tiempo hasta que el individuo se muestre indiferente entre las dos alternativas. En último lugar, si lo que se espera del paciente es una lista de estados de salud preferidos ante un tratamiento, empleamos la Escala de Categoría, que consiste en una línea horizontal de 10 centímetros con puntuaciones desde 0 a 100. La persona entrevistada coloca la lista de estados de salud según el orden de preferencia en la escala que después es normalizado a un intervalo entre 0 y 1. Los años de vida ajustado por calidad se obtienen multiplicando el valor de la calidad de vida por los años de vida estimados que vivirá el paciente. Sin embargo, ninguno de estas metodologías mencionadas consideran el factor edad, siendo necesario la inclusión de esta variable. Además, los pacientes pueden responder de manera subjetiva, situación en la que se requiere la opinión de un experto que determine el nivel de discapacidad del aquejado. De esta forma, se introduce el concepto de años de vida ajustado por discapacidad (AVAD) tal que el parámetro de utilidad de los AVAC será el complementario del parámetro de discapacidad de los AVAD Q^i=1-D^i. A pesar de que este último incorpora parámetros de ponderación de edad que no se contemplan en los AVAC. Además, bajo la suposición Q=1-D, podemos determinar la calidad de vida del individuo antes del tratamiento. Una vez obtenido los AVAC ganados, procedemos a la valoración monetaria de éstos. Para ello, partimos de la suposición de que la intervención sanitaria permite al individuo volver a realizar las labores que venía realizando. De modo que valoramos los salarios probables con una temporalidad igual a los AVAC ganados, teniendo en cuenta la limitación que supone la aplicación de este enfoque. Finalmente, analizamos los beneficios derivados del tratamiento (masa salarial probable) si empleamos la tabla GRF-95 (población femenina) y GRM-95 (población masculina).