| By: |
Svetlana Boyarchenko (The University of Texas at Austin);
Sergei Levendorskii (The University of Texas at Austin) |
| 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 |
| JEL: |
D81 D91 C61 G31 |
| Date: |
2005–06–13 |
| URL: |
http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0506005&r=dge |