Probabilistic intertemporal choice

Abstract

Probabilistic intertemporal choice involves situations when a decision maker does not choose the same stream of intertemporal outcomes when presented with the same decision problem repeatedly; or when a decision maker makes non-repeated choice decisions that are inherently inconsistent (i.e. they cannot be represented by any rational time preferences); or when an aggregated choice pattern of several decision makers is contradictory. This paper presents behavioural characterization (axiomatization) of an additively separable utility (that includes discounted utility, quasi-hyperbolic discounting, generalized hyperbolic discounting and liminal discounting as special cases) embedded into Fechner model of random errors (also known as strong utility) and Luce’s choice model (also known as strict utility). Such probabilistic extensions of classical utility representations of time preferences are consistent with some behavioural patterns that challenge the descriptive validity of the original (deterministic) theories (e.g. some instances of the common difference effect).