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Expected discounted utility

Author

Listed:
  • Pavlo Blavatskyy

    () (Montpellier Business School)

Abstract

Standard axioms of additively separable utility for choice over time and classic axioms of expected utility theory for choice under risk yield a generalized expected additively separable utility representation of risk-time preferences over probability distributions over sure streams of intertemporal outcomes. A dual approach is to use the analogues of the same axioms in a reversed order to obtain a generalized additively separable expected utility representation of time–risk preferences over intertemporal streams of probability distributions over sure outcomes. The paper proposes an additional axiom, which is called risk-time reversal, for obtaining a special case of the two representations—expected discounted utility. The axiom of risk-time reversal postulates that if a risky lottery over streams of sure intertemporal outcomes and an intertemporal stream of risky lotteries yield the same probability distribution of possible outcomes in every point in time then a decision-maker is indifferent between the two. This axiom is similar to assumption 2 “reversal of order in compound lotteries” in Anscombe and Aumann (Ann Math Stat 34(1):199–205, 1963, p. 201).

Suggested Citation

  • Pavlo Blavatskyy, 2020. "Expected discounted utility," Theory and Decision, Springer, vol. 88(2), pages 297-313, March.
  • Handle: RePEc:kap:theord:v:88:y:2020:i:2:d:10.1007_s11238-019-09718-3
    DOI: 10.1007/s11238-019-09718-3
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    References listed on IDEAS

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