A Theory of Endogenous Time Preference, and Discounted Utility Anomalies

33 Pages Posted: 20 Feb 2005

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Date Written: February 18, 2005

Abstract

We explain essentially all known discounted utility anomalies as artefacts of the optimizing behavior of an individual with a time-separable utility function, who perceives a good as a source of a stochastic consumption stream, and believes that she can wait for an optimal moment to buy or sell the good. For this individual, the fair price of the corresponding utility stream is interpreted as an integral of a deterministic utility stream multiplied by certain non-exponential factors which we interpret as endogenous discount factors; the factors are different for gains and losses, and depend on the utility function and underlying uncertainty. We provide analytic expressions and numerical examples for discount factors assuming simple utility functions and gaussian uncertainty.

Keywords: Time preference, discounted utility anomalies, decision-making under uncertainty, optimal stopping

JEL Classification: D81, D91, C61, G31

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., A Theory of Endogenous Time Preference, and Discounted Utility Anomalies (February 18, 2005). Available at SSRN: https://ssrn.com/abstract=669062 or http://dx.doi.org/10.2139/ssrn.669062

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
212
Abstract Views
1,549
rank
150,962
PlumX Metrics