Abstract

We provide the behavioral foundations of a preference model for risky payoff streams, a broad domain having lotteries, income streams under certainty, and repeated lotteries as special cases. For an individual who cares not only about total profit at the end, but also about partial profits, a standard set of rational axioms yield Bell's (1974) discounted incremental utility model. The model captures the intuition of time as inherently uncertain. To this bedrock, we add the notion that preferences are affected by range effects. The result is a behavioral model with a broad domain and consistent with a plethora of phenomena (bias towards short payback periods, the four-fold patterns for risk and time, preference reversals for risk and time, temporal patterns of decreasing or increasing impatience, and magnitude effects).

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