A theory of endogenous time preference, and discounted utility anomalies
AbstractWe explain essentially all known discounted utility anomalies as artefacts of the optimizing behavior of an individual with a time- separable utility function, who perceives a good as a source of a stochastic consumption stream, and believes that she can wait for an optimal moment to buy or sell the good. For this individual, the fair price of the corresponding utility stream is interpreted as an integral of a deterministic utility stream multiplied by certain non-exponential factors which we interpret as endogenous discount factors; the factors are different for gains and losses, and depend on the utility function and underlying uncertainty. We provide analytic expressions and numerical examples for discount factors assuming simple utility functions and gaussian uncertainty.
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Bibliographic InfoPaper provided by EconWPA in its series Microeconomics with number 0506005.
Length: 33 pages
Date of creation: 13 Jun 2005
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Note: Type of Document - pdf; pages: 33
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Time preference; discounted utility anomalies; decision-making under uncertainty; optimal stopping;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-19 (All new papers)
- NEP-DGE-2005-06-19 (Dynamic General Equilibrium)
- NEP-FIN-2005-06-19 (Finance)
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