When Utility Jumps: The Value of Having Cash in the Hand

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.