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Linking Decision and Time Utilities

  • Kontek, Krzysztof

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.

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File URL: http://mpra.ub.uni-muenchen.de/27541/1/MPRA_paper_27541.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27541.

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Date of creation: 18 Dec 2010
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Handle: RePEc:pra:mprapa:27541
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  1. repec:ubc:pmicro:halevy-04-10-29-10-08-43 is not listed on IDEAS
  2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  3. Kota Saito, 2009. "A Relationship Between Risk and Time Preferences," Discussion Papers 1477, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Drazen Prelec & George Loewenstein, 1991. "Decision Making Over Time and Under Uncertainty: A Common Approach," Management Science, INFORMS, vol. 37(7), pages 770-786, July.
  5. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  6. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  7. Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-62, June.
  8. Read, Daniel, 2001. " Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
  9. Kontek, Krzysztof, 2010. "Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz," MPRA Paper 27141, University Library of Munich, Germany.
  10. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten I. & Rutström, E. Elisabet, 2014. "Discounting behavior: A reconsideration," European Economic Review, Elsevier, vol. 71(C), pages 15-33.
  11. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  12. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  13. Kota Saito, 2009. "A Relationship between Risk and Time Preferences," Levine's Working Paper Archive 814577000000000269, David K. Levine.
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