# Lasse Mononen

Postdoc in Economics

University of Bielefeld

Research Interests: Economic Theory, Decision Theory, Revealed Preference

## Working Papers

Abstract: Dynamic consistency is crucial for credible evaluation of intergenerational choice plans that inherently lack commitment. We offer a general characterization for dynamically consistent intergenerational welfare aggregation. The aggregation is characterized by envy-guilt asymmetry in discounting with respect to future generations' utility: Higher utility than future generations' utility is discounted differently than lower utility than future generations' utility. This offers a simple and tractable characterization for the dynamically consistent choice rules.

Abstract: Experimental evidence on intertemporal choice has documented a preference for consumption smoothing that cannot be explained by discounted utility. We study a general class of dynamically consistent intertemporal dual-self preferences that accommodate a preference for consumption smoothing. We show that these general preferences have a simple and tractable structure. They are characterized by a gain-loss asymmetry where gains with respect to future utility are discounted differently than losses. As applications, first, we show that under the stationarity axiom, these preferences are convex or concave. Second, we show that dynamically consistent intertemporal Choquet expected utility coincides with discounted expected utility.

Abstract: We characterize the empirical content of expected utility. We show that the empirical content of the expected utility theory is contained in completeness, transitivity, and strong independence axioms. However, under commonly used weaker forms of independence axiom, the continuity axiom adds empirical content in the expected utility theory. This formalizes and makes exact the ubiquitous claim that the continuity axiom is a technical axiom without empirical content in the expected utility theory.

Abstract: The rationality of choices is one of the most fundamental assumptions for economic analysis. Yet, substantial evidence has documented choices that cannot be rationalized by utility maximization. Several measures of rationality have been introduced in the literature to quantify the extent of these rationality violations. But, it is not clear which of these measures should be used in applications and the measures are computationally very demanding that has restricted their widespread use. We introduce novel methods to compute the most used measures of rationality. Exploiting this computational progress, we offer simulation-based comparisons for the accuracy of different measures. Additionally, we consider novel variations of the measures that provide novel connections between the different measures. Especially, our simulations show that new type of variations of measures that give more weight to the existence of mistaken choices relative to the size of the mistakes outperform other measures. Finally, we offer a method to calculate statistical significance levels for violations of rationality in data.

Abstract: The assumption of rationality is one of the cornerstones of economic analysis. Yet, substantial evidence has documented violations of rationality in revealed preferences. Over the past decades, several measures have been proposed to quantify these violations. However, these measures are very different from each other and little is known about their foundations and how they compare with each other. This paper provides novel axiomatizations for the most used measures of rationality in the standard budget-choice setting. We show that these measures differ only on a few critical assumptions.

Abstract: Models of choice under uncertainty study choice behavior when outcomes depend on the realized state of the world. The typical assumption is that utilities of outcomes do not depend on the realized state and are state independent. Without this simplifying assumption, it is difficult to separately identify utilities and beliefs. This paper provides novel general foundations for models with state dependent utilities: once we depart from expected utility, it is often possible to uniquely identify utilities and beliefs. Specifically, we show that with general models of non-expected utility under ambiguity we have complete identification of utilities and probabilities under full-dimensional uncertainty. Additionally, we offer novel axiomatizations for state dependent dual-self variational expected utility and dual-self expected utility.

Abstract: The seminal Harsanyi's aggregation theorem axiomatized weighted utilitarianism based on expected utility theory. However, the weights assigned to each individual cannot be separated from the individual's utility. We show that once we depart from the expected utility framework, it is often possible to uniquely identify the utilities and the weights.

Abstract: Complexity aversion is well-documented in choice under risk. One of the main behavioral effects of complexity aversion is the event-splitting effect. This captures the change in the value of a lottery from splitting a prize of the lottery into two separate prizes and halving the probability. We relax the independence axiom for the event-splitting effect. Under continuity assumptions, this characterizes a decision-maker that is either 1) an expected utility maximizer with an entropic cost of complexity or 2) a power-weighted expected utility maximizer that weights probabilities by a power function. Additionally, ruling out an intrinsic cost of complexity characterizes a normalized power-weighted expected utility maximizer that normalizes the power-weighted probabilities to sum to 1 so there is no subcertainty in the probability weighting. Hence, the subcertainty of probability weighting can be interpreted as a multiplicative cost of complexity.

Abstract: We reconsider the foundations of expected utility without assuming the linearity of the independence axiom. We consider a decision-maker who cancels out common outcomes when comparing a pair of lotteries with the same probability tree. We show that if the decision-maker is consistent with first-order stochastic dominance or topological continuity in weak convergence, then the decision-maker is an expected utility maximizer. This offers a simple method to differentiate behavior between prospect theory, canceling out common outcomes in pairwise comparisons, and cumulative prospect theory, satisfying first-order stochastic dominance. Additionally, this offers a novel method to test technical continuity assumptions based on their behavioral content that rules out, e.g., prospect theory.

Abstract: Over the past decades, many measures have been introduced to quantify the extent of violations of rationality. However, these measures differ from each other in multiple dimensions, most prominently in their unit of measurement and their price invariance assumptions. We study the assumption of price invariance for measures of rationality in the special case of Afriat's Efficiency Index. We introduce four different variations of the index by varying whether the index is measured in monetary units and whether prices at different times are comparable. We show the axiomatic price invariance differences between these variations. Additionally, we show how these different price invariances are reflected in different alternative representations or interpretations of the index. This gives concrete comparisons for the price invariance assumptions that extend to other measures beyond Afriat's Index.

## Technical Working Papers

Abstract: An often used empirical approach models decision maker's choices by a latent expected utility model. We provide a behavioral characterization for when decision maker's preferences can be represented with a latent expected utility. This is characterized by relaxing the independence axiom for weak preference reversals.

Abstract: In this paper, we study preferences over consequences that are partitioned to different groups. The comparisons within groups are done with φ. We study when this local representation within groups can be extended into a global representation across groups with an additive variational component for each group.

Abstract: This paper studies additive utilities across different attributes when there might be synergies across the attributes if they are the same. We show that by removing these diagonal alternatives where multiple attributes are the same, we recover the additive representation. We consider an application to preference for simplicity.

## Work in Progress

"Cost of Complexity Under Risk"

Abstract: Complexity aversion is well-documented in choice under risk. One of the main effects of this is the event splitting effect. We relax the independence axiom for the event splitting effect and the common ratio effect of Allais paradox and consider a decision maker that cancels out common consequences with common probabilities when comparing a pair of lotteries. Under continuity and monotonicity assumptions, this essentially characterizes a decision maker that is an expected utility maximizer with a cost for complexity.

"On the Rationality of Markets: A Characterization and a Measurement"

Abstract: This paper studies when purchases made in a market could have been generated by rational individuals. First, we characterize the rationality of markets by extending the choice cycle based rationality characterization from individual’s rationality to market rationality. Second, we study how to measure the rationality of markets. We extend the rationality measures from measuring individual’s rationality to measuring the rationality of markets. We show that most measures of rationality provide unintuitive predictions for the rationality of markets and only Minimum Cost Index (Dean & Martin, 2016) based measures avoid the unintuitive predictions. Finally, we axiomatize a market rationality variation of Minimum Cost Index.

"Measuring Rationality With Norms"

Abstract: We study distance based measures of rationality that are combined with standard measures of rationality. These provide a non-parametric method to estimate the size of the choice mistakes. We provide new methods to compute them and compare them to the standard measures of rationality both empirically and based on simulations.

"A Purely State Dependent Model of Ambiguity"

Abstract: This paper studies novel axiomatically driven state dependent model under uncertainty. We study standard preferences in ambiguity literature with two non-indifferent acts that share the same sources of ambiguity. Under uncertainty aversion, these preferences are characterized by state dependent variational representation (pessimism over expected utility and additive cost of probability) with one exception: the state space is partitioned into positive, neutral, and negative states and the expected utility is weighted by the probability difference between positive and negative states. Under full-dimensional uncertainty, the intensities of preferences and the probabilities are separated and identified. However, the levels of utilities are not identified.