Expected discounted utility

Pavlo Blavatskyy ()
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Pavlo Blavatskyy: Montpellier Business School

Theory and Decision, 2020, vol. 88, issue 2, No 6, 297-313

Abstract: Abstract Standard axioms of additively separable utility for choice over time and classic axioms of expected utility theory for choice under risk yield a generalized expected additively separable utility representation of risk-time preferences over probability distributions over sure streams of intertemporal outcomes. A dual approach is to use the analogues of the same axioms in a reversed order to obtain a generalized additively separable expected utility representation of time–risk preferences over intertemporal streams of probability distributions over sure outcomes. The paper proposes an additional axiom, which is called risk-time reversal, for obtaining a special case of the two representations—expected discounted utility. The axiom of risk-time reversal postulates that if a risky lottery over streams of sure intertemporal outcomes and an intertemporal stream of risky lotteries yield the same probability distribution of possible outcomes in every point in time then a decision-maker is indifferent between the two. This axiom is similar to assumption 2 “reversal of order in compound lotteries” in Anscombe and Aumann (Ann Math Stat 34(1):199–205, 1963, p. 201).

Keywords: Choice under risk; Lottery; Expected utility theory; Intertemporal choice; Discounted utility (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11238-019-09718-3

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