Weighted Temporal Utility

Tinbergen Institute Discussion Paper 09-103/1

32 Pages Posted: 21 Nov 2009 Last revised: 26 Nov 2014

See all articles by Anke Gerber

Anke Gerber

Universität Hamburg

Kirsten I. M. Rohde

Erasmus University Rotterdam; Maastricht University - School of Business and Economics; Tinbergen Institute

Date Written: November 20, 2014

Abstract

We propose a utility representation for preferences over risky timed outcomes, the weighted temporal utility model. It separates subjective evaluations of outcomes from attitudes towards psychological distance induced by risks and delays. Subjective evaluations of outcomes may depend on the time of receipt. A natural special case of our model arises when decision makers evaluate an outcome according to the extra utility it generates on top of expected baseline consumption, which can be interpreted as the status quo. Thus, deviations from stationarity can be driven by expected changes in baseline consumption, and need not be irrational. Moreover, a decision maker with a weighted temporal utility function can have time-consistent yet non-stationary preferences or stationary yet time-inconsistent preferences. We provide a characterization of our model and propose a non-parametric approach to elicit a weighted temporal utility function.

Keywords: Intertemporal choice, stationarity, time-(in)consistency

JEL Classification: D91, D81

Suggested Citation

Gerber, Anke and Rohde, Kirsten I. M., Weighted Temporal Utility (November 20, 2014). Tinbergen Institute Discussion Paper 09-103/1, Available at SSRN: https://ssrn.com/abstract=1509348 or http://dx.doi.org/10.2139/ssrn.1509348

Anke Gerber (Contact Author)

Universität Hamburg ( email )

Faculty of Business, Economics and Social Sciences
Von-Melle-Park 5
Hamburg, 20146
Germany

Kirsten I. M. Rohde

Erasmus University Rotterdam ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 4089548 (Phone)
+31 10 4089141 (Fax)

Maastricht University - School of Business and Economics ( email )

Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands