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A Model of Utility Smoothing

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  • Katsutoshi Wakai

Abstract

Experimental studies have found that a decision maker prefers spreading good and bad outcomes evenly over time. We propose, in an axiomatic framework, a new model of discount factors that captures this preference for spread. The model provides a refinement of the discounted utility model while maintaining dynamic consistency. The derived discount factors incorporate gain/loss asymmetry recursively: the difference between average future utility and current utility defines a gain or a loss, and gains are discounted more than losses. This notion of utility smoothing can induce a preference for spread: if bad outcomes are concentrated on future periods, moving one of the bad outcomes to today would be beneficial because such an operation eliminates a large loss and replaces it with a small gain. Copyright The Econometric Society 2008.

Suggested Citation

  • Katsutoshi Wakai, 2008. "A Model of Utility Smoothing," Econometrica, Econometric Society, vol. 76(1), pages 137-153, January.
    • Handle: RePEc:ecm:emetrp:v:76:y:2008:i:1:p:137-153
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    File URL: http://hdl.handle.net/10.1111/j.1468-0262.2008.00820.x
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    Citations

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    Cited by:

    1. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2022. "Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting," Journal of Economic Theory, Elsevier, vol. 204(C).
    2. Jean-Pierre Drugeon & Thai Ha-Huy & Thi Do Hanh Nguyen, 2019. "On maximin dynamic programming and the rate of discount," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(3), pages 703-729, April.
    3. Obara, Ichiro & Park, Jaeok, 2017. "Repeated games with general discounting," Journal of Economic Theory, Elsevier, vol. 172(C), pages 348-375.
    4. Nina Anchugina, 2015. "A simple framework for the axiomatization of exponential and quasi-hyperbolic discounting," Papers 1511.06454, arXiv.org.
    5. Shigeta, Yuki, 2020. "Gain/loss asymmetric stochastic differential utility," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    6. Wakai, Katsutoshi, 2011. "Modeling nonmonotone preferences: The case of utility smoothing," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 213-226, March.
    7. Jean-Pierre Drugeon & Thai Ha-Huy & Thi-Do-Hanh Nguyen, 2018. "On Maximin Optimization Problems & the Rate of Discount: a Simple Dynamic Programming Argument," Working Papers halshs-01761997, HAL.
    8. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    9. Myong‐Il Kang & Shinsuke Ikeda, 2014. "Time Discounting And Smoking Behavior: Evidence From A Panel Survey," Health Economics, John Wiley & Sons, Ltd., vol. 23(12), pages 1443-1464, December.
    10. Katsutoshi Wakai, 2013. "Intertemporal utility smoothing under uncertainty," Theory and Decision, Springer, vol. 74(2), pages 285-310, February.
    11. Wakai, Katsutoshi, 2012. "An infinite-horizon model of nonmonotone utility smoothing," Economics Letters, Elsevier, vol. 116(2), pages 170-173.
    12. Eisei Ohtaki, 2023. "Optimality in an OLG model with nonsmooth preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 611-659, September.
    13. Wakai, Katsutoshi, 2013. "An alternative axiomatization of intertemporal utility smoothing," Economics Letters, Elsevier, vol. 119(2), pages 224-227.
    14. Nina Anchugina, 2017. "A simple framework for the axiomatization of exponential and quasi-hyperbolic discounting," Theory and Decision, Springer, vol. 82(2), pages 185-210, February.
    15. Jawwad Noor & Norio Takeoka, "undated". "Impatience as Selfishness," Boston University - Department of Economics - Working Papers Series WP2018-008, Boston University - Department of Economics.

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