Range and Sign Dependent Utility for Risk and Time

40 Pages Posted: 27 Jun 2018

See all articles by Manel Baucells

Manel Baucells

University of Virginia - Darden School of Business

Krzysztof Kontek

Warsaw School of Economics (SGH)

Michał Lewandowski

Warsaw School of Economics (SGH) - Institute of Econometrics

Date Written: June 12, 2018

Abstract

We introduce range and sign dependent utility, an integrative behavioral model for uncertain cash flows. For gambles played today, the model can be seen as an extension of original prospect theory based on range, rather than rank. For single future payouts, the model agrees with hyperbolic discounting; whereas for multiple cash flows it takes a novel form. The model comes with a framing rule to set the range and the reference point, and three functions: a loss averse value function, a s-shaped range distortion function, and a subjective survival function for time. Range and sign dependent utility jointly explains the classical Allais paradoxes, the Samuelson paradox for risk and time, the preference reversal phenomenon and, for time, decreasing impatience and magnitude effects.

Keywords: reference dependent utility, range dependent utility, sign dependent utility, prospect theory, hyperbolic discounting, preference reversals

JEL Classification: D01, D91

Suggested Citation

Baucells, Manel and Kontek, Krzysztof and Lewandowski, Michał, Range and Sign Dependent Utility for Risk and Time (June 12, 2018). Darden Business School Working Paper No. 3194874, Available at SSRN: https://ssrn.com/abstract=3194874 or http://dx.doi.org/10.2139/ssrn.3194874

Manel Baucells (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Krzysztof Kontek

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Michał Lewandowski

Warsaw School of Economics (SGH) - Institute of Econometrics ( email )

Niepodleglosci 164
Warsaw, 02-554
Poland

HOME PAGE: http://www.sgh.waw.pl/mlewandowski

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