Decision-Making When Things Are Only a Matter of Time
26 Pages Posted: 14 Oct 2015 Last revised: 19 Aug 2019
Date Written: August 19, 2019
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: Suggested Citation