'Utility-Based Utility', Second Version

9 Pages Posted: 12 Jan 2008

See all articles by David Cass (deceased)

David Cass (deceased)

University of Pennsylvania, School of Arts & Sciences, Department of Economics (deceased)

Date Written: January 4, 2008

Abstract

A major virtue of von Neumann-Morgenstern utilities, for example, in the theory of general financial equilibrium (GFE), is that they ensure intertemporal consistency: consumption-portfolio plans (for the future) are in fact executed (in the future) - assuming that there is perfect foresight about relevant endogenous variables. This note proposes an alternative to expected utility, one which also delivers consistency between plan and execution - and more. In particular, it turns out that one special case is in fact simply discounted (subjective) expected utility. Moreover, this alternative formulation affords an extremely natural setting for introducing extrinsic uncertainty. The key idea behind my approach is to divorce the concept of filtration (of the state space) from any considerations involving probability (on the state space), and then concentrate attention on nested utilities of consumption looking forward from any date-event: utility today depends only on consumption today and prospective utility of consumption tomorrow, utility tomorrow depends only on consumption tomorrow and prospective utility of consumption the day after tomorrow, and so on.

Keywords: Utility theory, Expected utility, Intertemporal consistency, Extrinsic uncertainty, Cass-Shell Immunity Theorem

JEL Classification: D61, D81, D91

Suggested Citation

Cass (deceased), David, 'Utility-Based Utility', Second Version (January 4, 2008). PIER Working Paper No. 08-001, Available at SSRN: https://ssrn.com/abstract=1082877 or http://dx.doi.org/10.2139/ssrn.1082877

David Cass (deceased) (Contact Author)

University of Pennsylvania, School of Arts & Sciences, Department of Economics (deceased)

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