Discounted utility and present value: A close relation
Operations Research , Volume 63 - Issue 6 p. 1420- 1430
We introduce a new type of preference condition for intertemporal choice, which requires present values to be independent of various other variables. The new conditions are more concise and more transparent than traditional ones. They are directly related to applications because present values are widely used tools in intertemporal choice. Our conditions give more general behavioral axiomatizations, which facilitate normative debates and empirical tests of time inconsistencies and related phenomena. Like other preference conditions, our conditions can be tested qualitatively. Unlike other preference conditions, our conditions can also be directly tested quantitatively, and we can verify the required independence of present values from predictors in regressions. We show how similar types of preference conditions, imposing independence conditions between directly observable quantities, can be developed for decision contexts other than intertemporal choice and can simplify behavioral axiomatizations there. Our preference conditions are especially efficient if several types of aggregation are relevant because we can handle them in one stroke. We thus give an efficient axiomatization of a market pricing system that is (i) arbitrage-free for hedging uncertainties and (ii) time consistent.
|Arbitrage-Free, Decision Analysis, Discounted Utility, Functions, Intertemporal Optimization, Mathematics, Multi-Attribute, Preference Axiomatization, Present Value, Sequential, Time Inconsistency, Utility|
|ERIM Top-Core Articles|
|Organisation||Erasmus School of Economics|
Bleichrodt, H, Keskin, U, Rohde, K.I.M, Spinu, V, & Wakker, P.P. (2015). Discounted utility and present value: A close relation. Operations Research, 63(6), 1420–1430. doi:10.1287/opre.2015.1433