Preferences Over Time and Under Uncertainty: Theoretical Foundations

52 Pages Posted: 2 Aug 2021

See all articles by Ali al-Nowaihi

Ali al-Nowaihi

University of Leicester - Department of Economics

Sanjit Dhami

University of Leicester

Date Written: 2021

Abstract

We formulate a general theory of preferences over outcome-time-probability triplets and decompose uncertainty into risk and hazard. We define the delay, defer, shift and certainty functions that can be uniquely elicited from behaviour. These individually determine stationarity, the common difference effect and its converse; constant, decreasing and increasing impatience; additivity, subadditivity and super additivity; probability independence, the certainty effect and its converse. We propose a general discounted utility model which encompasses the main empirically supported discounted utility models. We show that our axioms on preferences are satisfied in our general discounted utility model. Finally, we discuss the various explanations of the common difference effect.

JEL Classification: D150, D910, D810

Suggested Citation

al-Nowaihi, Ali and Dhami, Sanjit, Preferences Over Time and Under Uncertainty: Theoretical Foundations (2021). CESifo Working Paper No. 9215, Available at SSRN: https://ssrn.com/abstract=3896150 or http://dx.doi.org/10.2139/ssrn.3896150

Ali Al-Nowaihi

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Sanjit Dhami (Contact Author)

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

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