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Discount factors ex post and ex ante, and discounted utility anomalies

Author

Listed:
  • Svetlana Boyarchenko

    (The University of Texas, Austin)

  • Sergei Levendorskii

    (The University of Texas, Austin)

Abstract

The real options approach is used to explain discounted utility anomalies as artifacts of the optimizing behavior of an individual with standard preferences, who perceives the utility from consumption in the future as uncertain. For this ndividual, waiting is valuable because uncertainty is revealed over time. The fair price (or compensation) that the individual agrees to pay (or accept) today is the expected value of utility of the future gain (or loss) multiplied by a certain non- exponential factor which weinterpret as a discount factor ex ante. The factors ex ante are different for gains and losses, and depend on the utility function and underlying uncertainty. After the decision of exchange had been made, valuation ex post reduces to calculation of the standard expected present value. We provide analytic expressions and numerical examples for discount factors assuming different utility functions and models of uncertainty, and demonstrate that our explanation of discounted utility anomalies is robust.

Suggested Citation

  • Svetlana Boyarchenko & Sergei Levendorskii, 2005. "Discount factors ex post and ex ante, and discounted utility anomalies," Microeconomics 0510013, EconWPA, revised 13 Dec 2005.
  • Handle: RePEc:wpa:wuwpmi:0510013
    Note: Type of Document - pdf; pages: 36
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0510/0510013.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stefania Albanesi & Claudia Olivetti, 2006. "Gender roles and technological progress," 2006 Meeting Papers 411, Society for Economic Dynamics.
    2. Gerber, Anke & Rohde, Kirsten I.M., 2010. "Risk and preference reversals in intertemporal choice," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 654-668, December.
    3. Jawwad Noor, 2007. "Hyperbolic Discounting and the Standard," Levine's Bibliography 321307000000000939, UCLA Department of Economics.
    4. Anke Gerbe & Kirsten I.M. Rohde, 2010. "Risk and Preference Reversals in Intertemporal Choice," Post-Print hal-00911832, HAL.

    More about this item

    Keywords

    real options; time preference; discounted utility anomalies;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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