IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1801.03680.html

The time interpretation of expected utility theory

Author

Listed:
  • Ole Peters
  • Alexander Adamou

Abstract

Economic models often maximise expectation values of wealth or utility. In non-ergodic settings, these can differ from time-averages, so that maximising expected outcomes need not maximise -- and can systematically reduce -- long-run wealth or utility. Ergodicity economics highlights this problem and models individual agents as maximising wealth in the long run, known as growth optimality. Two instances where expected utility maximisation maps to growth optimality are known: linear utility does this for additive wealth dynamics; and logarithmic utility for multiplicative wealth dynamics. Here we show that the mapping holds more generally when the utility function coincides with the ergodicity transformation in the growth optimal model. This mapping offers a theoretical basis for choosing utility functions and suggests the testable hypothesis that wealth dynamics are predictive of risk preferences.

Suggested Citation

  • Ole Peters & Alexander Adamou, 2018. "The time interpretation of expected utility theory," Papers 1801.03680, arXiv.org, revised Sep 2026.
    • Handle: RePEc:arx:papers:1801.03680
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/1801.03680
    File Function: Latest version
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jos'e Cl'audio do Nascimento, 2019. "Behavioral Biases and Nonadditive Dynamics in Risk Taking: An Experimental Investigation," Papers 1908.01709, arXiv.org, revised Apr 2023.
    2. Yonatan Berman & Mark Kirstein, 2021. "Risk Preferences in Time Lotteries," Papers 2108.08366, arXiv.org.
    3. Alexander Adamou & Yonatan Berman & Diomides Mavroyiannis & Ole Peters, 2021. "Microfoundations of Discounting," Decision Analysis, INFORMS, vol. 18(4), pages 257-272, December.
    4. Carlos Rodríguez Raposo & Pablo Coello Pulido, 2021. "Ergodicity transformation for additive-ruin wealth dynamic," Working Papers hal-03198073, HAL.
    5. David Meder & Finn Rabe & Tobias Morville & Kristoffer H Madsen & Magnus T Koudahl & Ray J Dolan & Hartwig R Siebner & Oliver J Hulme, 2021. "Ergodicity-breaking reveals time optimal decision making in humans," PLOS Computational Biology, Public Library of Science, vol. 17(9), pages 1-25, September.
    6. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    7. Andreozzi, Luciano, 2021. "Ergodicity in Economics: a Decision theoretic evaluation," SocArXiv axkfg, Center for Open Science.
    8. Alexander Adamou & Yonatan Berman & Ole Peters, 2020. "The Two Growth Rates of the Economy," Papers 2009.10451, arXiv.org.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1801.03680. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.