Time preferences under certain expectations

Franz Eisenführ (), Martin Weber and Thomas Langer ()
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Thomas Langer: University of Münster

Chapter Chapter 11 in Rational Decision Making, 2010, pp 323-344 from Springer

Abstract: Summary In many decision-making processes you will have to weigh immediate against future consequences. In these processes, the time reference of the consequences must be taken into consideration. Intertemporal decisions can be understood as multiple objective decisions with additive value functions. The i-th attribute is replaced by the i-th point in time. The prerequisite of mutual preference independence for an additive intertemporal value function is not always given. If this prerequisite cannot be met, redefining the system of objectives generally helps. The intertemporal value function can be simplified to the discounting or the Harvey models if - apart from the condition of mutual preference independence - other axioms are fulfilled as well. For the projection of temporally inconsistent and possibly undesirable decisions you can use the quasi-hyperbolic discounting model and take preventive measures accordingly. Whether you wish to use one of these simple models depends on your acceptance of the proposed axioms. Should you find all of the axiom systems inappropriate for your process of rational decision-making, you should take recourse to the general form of the (additive) intertemporal value function. Should you have options for temporal transformation, as, for instance given in a perfect capital market, you can use the discounting model independent of axiomatic considerations and personal preferences.

Date: 2010
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DOI: 10.1007/978-3-642-02851-9_11

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