Abstract:
Different theoretical explanations have been developed for seemingly inconsistent
actions that deal with varying levels of risk and time. We propose a
simple model of utility that unifies these seemingly separate phenomena,
while not departing too far from the standard models of utility maximization
already in use. Our driving assumption is that preferences over riskier outcomes
discontinuously depart from preferences under certainty; a jump from
no risk to some risk is fundamentally different from a movement of some risk
to more risk.
