Linking Decision and Time Utilities
This paper presents the functional relationship between two areas of interest in contemporary behavioral economics: one concerning choices under conditions of risk, the other concerning choices in time. The paper first presents the general formula of the relationship between decision utility, the survival function, and the discounting function, where decision utility is an alternative to Cumulative Prospect Theory in describing choices under risk (Kontek, 2010). The stretched exponential function appears to be a simple functional form of the resulting discounting function. Solutions obtained using more complex forms of decision utility and survival functions are also considered. These likewise lead to the stretched exponential discounting function. The paper shows that the relationship may also have other forms, including the hyperbolic functions typically used to describe the intertemporal experimental results. This solution has however several descriptive disadvantages, which restricts its common use in the description of lottery and intertemporal choices, and in financial asset valuations.
|Date of creation:||18 Dec 2010|
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- Andersen, Steffen & Harrison, Glenn W. & Lau, Morten I. & Rutström, E. Elisabet, 2014.
"Discounting behavior: A reconsideration,"
European Economic Review,
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- Kontek, Krzysztof, 2010. "Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz," MPRA Paper 27141, University Library of Munich, Germany.
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- Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
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- George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
- Kota Saito, 2009. "A Relationship between Risk and Time Preferences," Levine's Working Paper Archive 814577000000000269, David K. Levine.
- repec:ubc:pmicro:halevy-04-10-29-10-08-43 is not listed on IDEAS
- Paul A. Samuelson, 1937. "A Note on Measurement of Utility," Review of Economic Studies, Oxford University Press, vol. 4(2), pages 155-161.
- Kota Saito, 2009. "A Relationship Between Risk and Time Preferences," Discussion Papers 1477, Northwestern University, Center for Mathematical Studies in Economics and Management Science. Full references (including those not matched with items on IDEAS)
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