Range Utility Theory for Uncertain Cash-flows

34 Pages Posted: 18 Oct 2019

See all articles by Manel Baucells

Manel Baucells

University of Virginia - Darden School of Business

Michał Lewandowski

Warsaw School of Economics (SGH) - Institute of Econometrics

Krzysztof Kontek

Warsaw School of Economics (SGH)

Date Written: October 8, 2019

Abstract

We introduce range utility theory, an integrative behavioral model for uncertain cash flows. The model modifies rank dependent utility, by replacing rank principles with range principles, and extends the domain to time. For gambles played in the future, the model generalizes the probability and time trade-off model. The model comes with three functions: a value function, a subjective survival function for time and an s-shaped range distortion function, and. Range Utility Theory jointly explains the Samuelson paradox for risk and time, the preference reversal phenomenon, and hyperbolic discounting; and produces many novel testable predictions.

Keywords: expected utility, discounted cash flows, hyperbolic discounting, range dependent utility, reference dependent utility, preference reversals

Suggested Citation

Baucells, Manel and Lewandowski, Michał and Kontek, Krzysztof, Range Utility Theory for Uncertain Cash-flows (October 8, 2019). Darden Business School Working Paper No. 3466617, Available at SSRN: https://ssrn.com/abstract=3466617 or http://dx.doi.org/10.2139/ssrn.3466617

Manel Baucells (Contact Author)

University of Virginia - Darden School of Business ( email )

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

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

Krzysztof Kontek

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
41
Abstract Views
274
PlumX Metrics