Arbeitspapier

Once upon a time preference: How rationality and risk aversion change the rationale for discounting

The paper develops an axiomatic framework for rational decision making. The von Neumann-Morgenstern axioms give rise to a richer risk attitude than that captured in the standard discounted expected utility model. I derive three models that permit a more comprehensive risk evaluation. These preference representations differ regarding the consistency requirements that are imposed in the evaluation of uncertain scenarios. Imposing all rationality constraints jointly eliminates pure time preference from economic evaluation. The resulting preference representation still gives reduced weight to expected future utility when uncertainty increases over time. The more we know about the future welfare consequences of our (in)actions, the more weight they receive. If uncertainty is endogenous to the decision process, the new rationale for discounting will yield quite different policy implications than the discounted expected utility model based on pure time preference.

Sprache
Englisch

Erschienen in
Series: CESifo Working Paper ; No. 3793

Klassifikation
Wirtschaft
Microeconomic Behavior: Underlying Principles
Welfare Economics: General
Criteria for Decision-Making under Risk and Uncertainty
Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Project Evaluation; Social Discount Rate
Sustainable Development
Valuation of Environmental Effects
Climate; Natural Disasters and Their Management; Global Warming
Thema
time preference
discounting
uncertainty
expected utility
recursive utility
risk aversion
intertemporal substitutability
stationarity
certainty additivity
temporal lotteries
intertemporal risk aversion
temporal resolution of risk
discount rate

Ereignis
Geistige Schöpfung
(wer)
Christian Traeger
Ereignis
Veröffentlichung
(wer)
Center for Economic Studies and ifo Institute (CESifo)
(wo)
Munich
(wann)
2012

Handle
Letzte Aktualisierung
10.03.2025, 11:43 MEZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Christian Traeger
  • Center for Economic Studies and ifo Institute (CESifo)

Entstanden

  • 2012

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