Decision-Making When Things Are Only a Matter of Time

26 Pages Posted: 14 Oct 2015 Last revised: 19 Aug 2019

See all articles by Sebastian Ebert

Sebastian Ebert

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: August 19, 2019

Abstract

This article gives a comprehensive treatment of preferences regarding time risk—the risk of something happening sooner or later—within the expected discounted utility model. We characterize the signs of the discount function’s derivatives of all orders and show how these signs are decisive for time risk preferences. We introduce the notions of prudent and temperate discounting, and illustrate their importance for economic behavior. Several applications in which an important event is “only a matter of time” are presented. The seminal net present value rule to evaluate investment opportunities is generalized to take into account the timing uncertainty of cash flows.

Keywords: risk preferences; time preferences; time risk preferences; prudent discounting

JEL Classification: D81; D90

Suggested Citation

Ebert, Sebastian, Decision-Making When Things Are Only a Matter of Time (August 19, 2019). Available at SSRN: https://ssrn.com/abstract=2674160 or http://dx.doi.org/10.2139/ssrn.2674160

Sebastian Ebert (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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