Linking Decision and Time Utilities
AbstractThis paper presents the functional relationship between two areas of interest in contemporary behavioral economics: one concerning choices under conditions of risk, the other concerning choices in time. The paper first presents the general formula of the relationship between decision utility, the survival function, and the discounting function, where decision utility is an alternative to Cumulative Prospect Theory in describing choices under risk (Kontek, 2010). The stretched exponential function appears to be a simple functional form of the resulting discounting function. Solutions obtained using more complex forms of decision utility and survival functions are also considered. These likewise lead to the stretched exponential discounting function. The paper shows that the relationship may also have other forms, including the hyperbolic functions typically used to describe the intertemporal experimental results. This solution has however several descriptive disadvantages, which restricts its common use in the description of lottery and intertemporal choices, and in financial asset valuations.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27541.
Date of creation: 18 Dec 2010
Date of revision:
Discounted Utility; Hyperbolic Discounting; Decision Utility; Prospect Theory; Asset Valuation;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D90 - Microeconomics - - Intertemporal Choice - - - General
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-CBE-2011-01-03 (Cognitive & Behavioural Economics)
- NEP-EVO-2011-01-03 (Evolutionary Economics)
- NEP-EXP-2011-01-03 (Experimental Economics)
- NEP-MAC-2011-01-03 (Macroeconomics)
- NEP-NEU-2011-01-03 (Neuroeconomics)
- NEP-UPT-2011-01-03 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Strotz meets Allais: Diminishing Impatience and the Certainty Effect,"
Microeconomics.ca working papers
halevy-04-10-29-10-08-43, Vancouver School of Economics, revised 25 Feb 2014.
- Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-62, June.
- Kontek, Krzysztof, 2010. "Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz," MPRA Paper 27141, University Library of Munich, Germany.
- Kota Saito, 2009. "A Relationship Between Risk and Time Preferences," Discussion Papers 1477, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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"Prospect Theory: An Analysis of Decision under Risk,"
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- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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