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A new axiomatization of discounted expected utility

Author

Listed:
  • Berenice Anne Neumann

    (University Trier)

  • Marc Oliver Rieger

    (University Trier)

Abstract

We present a new axiomatization of the classical discounted expected utility model, which is primarily used as a decision model for consumption streams under risk. This new axiomatization characterizes discounted expected utility as a model that satisfies natural extensions of standard axioms as in the one-period case and two additional axioms. The first axiom is a weak form of time separability. It only requires that the choice between certain constant consumption streams and lotteries should be made by just taking into account the time periods where the consumption is different. The second axiom, the time–probability equivalence, requires that risk and time preferences basically work in the same way. Moreover, we prove that preferences satisfying the natural extensions of the standard axioms as well as the first axiom can be represented in a simple form relying on three functions linked to the risk or time preferences in simple situations. Finally, we illustrate that several examples that are not fully time separable satisfy all our axioms except for the time–probability equivalence.

Suggested Citation

  • Berenice Anne Neumann & Marc Oliver Rieger, 2023. "A new axiomatization of discounted expected utility," Theory and Decision, Springer, vol. 95(4), pages 515-537, November.
    • Handle: RePEc:kap:theord:v:95:y:2023:i:4:d:10.1007_s11238-023-09932-0
    DOI: 10.1007/s11238-023-09932-0
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    References listed on IDEAS

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