Linking Decision and Time Utilities
16 Pages Posted: 18 Dec 2010 Last revised: 21 Dec 2010
Date Written: December 18, 2010
This paper presents the functional relationship between two areas of interest in contemporary behavioral economics: one concerning choices under conditions of risk, the other concerning choices in time. The paper first presents the general formula of the relationship between decision utility, the survival function, and the discounting function, where decision utility is an alternative to Cumulative Prospect Theory in describing choices under risk (Kontek, 2010). The stretched exponential function appears to be a simple functional form of the resulting discounting function. Solutions obtained using more complex forms of decision utility and survival functions are also considered. These likewise lead to the stretched exponential discounting function. The paper shows that the relationship may also have other forms, including the hyperbolic functions typically used to describe the intertemporal experimental results. This solution has however several descriptive disadvantages, which restricts its common use in the description of lottery and intertemporal choices, and in financial asset valuations.
Keywords: Discounted Utility, Hyperbolic Discounting, Decision Utility, Prospect Theory, Asset Valuation
JEL Classification: C91, D03, D81, D90, E43, G12
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