Counterfactuals with Latent Information

We describe a methodology for making counterfactual predictions in settings where the information held by strategic agents and the distribution of payoff-relevant states of the world are unknown. The analyst observes behavior assumed to be rationalized by a Bayesian model, in which agents maximize expected utility, given partial and differential information about the state. A counterfactual prediction is desired about behavior in another strategic setting, under the hypothesis that the distribution of the state and agents’ information about the state are held fixed. When the data and the desired counterfactual prediction pertain to environments with finitely many states, players, and actions, the counterfactual prediction is described by finitely many linear inequalities, even though the latent parameter, the information structure, is infinite dimensional. (JEL D44, D82, D83)

Joint pricing and ordering decisions for a loss-averse retailer with quantity-oriented reference point effect and demand uncertainty: a distribution-free approach

PurposeThis work examines the joint pricing and ordering (JPO) decisions for a loss-averse retailer with quantity-oriented reference point (RP) effect under demand uncertainty.Design/methodology/approachThe demand is assumed to be uncertain with the mean and variance as the only known information. The prospect theory is used to model the retailer's expected utility. An expected utility maximization model in the distribution-free approach (DFA) is then developed. Using duality theory, the expected utility under the worst-case distribution is transformed into tractable piece-wise functions. To examine the effectiveness of the DFA in coping with the demand uncertainty, a stochastic programming model is developed and its solutions are used as benchmarks.FindingsThe proposed model and solution approach can effectively hedge against the demand uncertainty. The JPO decisions are significantly influenced by the LA coefficient and the reference level. The LA has a stronger influence than the reference level does on the expected utility. An excessive LA is detrimental while an appropriate reference level is beneficial to the retailer.Practical implicationsThe results of this work are applicable to loss-averse retailers with the quantity-oriented RP when making JPO decisions with difficulty in predicting the demands.Originality/valueThe demand is assumed to be uncertain in this work, but a certain demand distribution is usually assumed in the existing literature. The DFA is used to study JPO decisions for the loss-averse retailer with quantity-oriented RP effect under the uncertain demand.

How Does Misperception Affect Zero-Determinant Strategies In Iterated Prisoner’s Dilemma?

Zero-determinant (ZD) strategies have attracted wide attention in Iterated Prisoner’s Dilemma (IPD) games, since the player equipped with ZD strategies can unilaterally enforce the two players’ expected utilities subjected to a linear relation. On the other hand, uncertainties, which may be caused by misperception, occur in IPD inevitably in practical circumstances. To better understand the situation, we consider the influence of misperception on ZD strategies in IPD, where the two players, player X and player Y , have different cognitions, but player X detects the misperception and it is believed to make ZD strategies by player Y. We provide a necessary and sufficient condition for the ZD strategies in IPD with misperception, where there is also a linear relationship between players’ utilities in player X’s cognition. Then we explore bounds of players’ expected utility deviation from a linear relationship in player X’s cognition with also improving its own utility.

What Is the Right Way to Make a Wrong a Right?

It seems clear that the most challenging versions of the nonidentity problem involve, at least implicitly, claims about probability. Once we realize that, we are tempted to appeal to the concept of expected utility for purposes of understanding the problem and analyzing the underlying cases. But there are reasons to think that that approach is ultimately unsatisfactory. Thus the question remains open just how probabilities are to be brought to bear in connection with nonidentity. This paper explores some of our options and some of the challenges those options will face.

Some Resultats on Optimal Allocation of Policy Limits and Deductibles: Mixture Model

The main purpose of this paper is to introduce and investigate stochastic orders of scalar products of random vectors. We study the problem of finding maximal expected utility for some functional on insurance portfolios involving some additional (independent) randomization. Furthermore, applications in policy limits and deductible are obtained, we consider the scalar product of two random vectors which separates the severity effect and the frequency effect in the study of the optimal allocation of policy limits and deductibles. In that respect, we obtain the ordering of the optimal allocation of policy limits and deductibles when the dependence structure of the losses is unknown. Our application is a further study of [1 − 6].

Risk aversion over finite domains

We investigate risk attitudes when the underlying domain of payoffs is finite and the payoffs are, in general, not numerical. In such cases, the traditional notions of absolute risk attitudes, that are designed for convex domains of numerical payoffs, are not applicable. We introduce comparative notions of weak and strong risk attitudes that remain applicable. We examine how they are characterized within the rank-dependent utility model, thus including expected utility as a special case. In particular, we characterize strong comparative risk aversion under rank-dependent utility. This is our main result. From this and other findings, we draw two novel conclusions. First, under expected utility, weak and strong comparative risk aversion are characterized by the same condition over finite domains. By contrast, such is not the case under non-expected utility. Second, under expected utility, weak (respectively: strong) comparative risk aversion is characterized by the same condition when the utility functions have finite range and when they have convex range (alternatively, when the payoffs are numerical and their domain is finite or convex, respectively). By contrast, such is not the case under non-expected utility. Thus, considering comparative risk aversion over finite domains leads to a better understanding of the divide between expected and non-expected utility, more generally, the structural properties of the main models of decision-making under risk.