A theory of endogenous time preference, and discounted utility anomalies

Svetlana Boyarchenko () and Sergei Levendorskii
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Sergei Levendorskii: The University of Texas at Austin

Microeconomics from EconWPA

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 (search for similar items in EconPapers)
JEL-codes: D81 D91 C61 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-fin
Date: 2005-06-13
Note: Type of Document - pdf; pages: 33
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:0506005

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