Discounting and Risk Neutrality

Case Western Reserve University, Technical Report Paper No. TM-724F

25 Pages Posted: 17 Feb 2006

See all articles by Matthew J. Sobel

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Date Written: September 15, 2006

Abstract

Consider a binary relation on a real vector space of vector-valued discrete-time stochastic processes. If the binary relation satisfies four axioms, then there are unique discount factors such that preferences regarding stochastic processes induce prefences among present value random vectors. Three of the axioms are familiar: weak ordering, continuity, and non-triviality. The fourth axiom is decomposition. Also, if preferences satisfy the four axioms then the following properties are equivalent: the converse of decomposition, the existence of a felicity function on the set of random vectors, and risk neutrality. In this limited sense, discounting implies risk neutrality.

Keywords: discounting, risk neutrality, utility, preferences

JEL Classification: D81, D99, G12

Suggested Citation

Sobel, Matthew J. and Sobel, Matthew J., Discounting and Risk Neutrality (September 15, 2006). Case Western Reserve University, Technical Report Paper No. TM-724F, Available at SSRN: https://ssrn.com/abstract=883122 or http://dx.doi.org/10.2139/ssrn.883122

Matthew J. Sobel (Contact Author)

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
177
Abstract Views
1,515
rank
212,916
PlumX Metrics