Linking Decision and Time Utilities

16 Pages Posted: 18 Dec 2010 Last revised: 21 Dec 2010

Date Written: December 18, 2010

Abstract

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

Suggested Citation

Kontek, Krzysztof, Linking Decision and Time Utilities (December 18, 2010). Available at SSRN: https://ssrn.com/abstract=1727985 or http://dx.doi.org/10.2139/ssrn.1727985

Krzysztof Kontek (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
67
Abstract Views
828
rank
370,744
PlumX Metrics