Weighted Temporal Utility
Tinbergen Institute Discussion Paper 09-103/1
32 Pages Posted: 21 Nov 2009 Last revised: 26 Nov 2014
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: Suggested Citation
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