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Discounted Utility and Present Value—A Close Relation

Han Bleichrodt (), Umut Keskin (), Kirsten I. M. Rohde (), Vitalie Spinu () and Peter Wakker
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Han Bleichrodt: Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, 3000 DR, the Netherlands
Umut Keskin: Department of Economics, Istanbul Bilgi University, 34060 Eyup Istanbul, Turkey
Kirsten I. M. Rohde: Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, 3000 DR, the Netherlands
Vitalie Spinu: Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, 3000 DR, the Netherlands

Operations Research, 2015, vol. 63, issue 6, 1420-1430

Abstract: We introduce a new type of preference condition for intertemporal choice, which requires present values to be independent of various other variables. The new conditions are more concise and more transparent than traditional ones. They are directly related to applications because present values are widely used tools in intertemporal choice. Our conditions give more general behavioral axiomatizations, which facilitate normative debates and empirical tests of time inconsistencies and related phenomena. Like other preference conditions, our conditions can be tested qualitatively. Unlike other preference conditions, our conditions can also be directly tested quantitatively, and we can verify the required independence of present values from predictors in regressions. We show how similar types of preference conditions, imposing independence conditions between directly observable quantities, can be developed for decision contexts other than intertemporal choice and can simplify behavioral axiomatizations there. Our preference conditions are especially efficient if several types of aggregation are relevant because we can handle them in one stroke. We thus give an efficient axiomatization of a market pricing system that is (i) arbitrage-free for hedging uncertainties and (ii) time consistent.

Keywords: intertemporal optimization; present value; discounted utility; time inconsistency; arbitrage-free; preference axiomatization; decision analysis; sequential; utility; multi-attribute; mathematics; functions (search for similar items in EconPapers)
Date: 2015
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