Abstract
A major virtue of von Neumann-Morgenstern utilities, for example, in the theory of general financial equilibrium (GFE), is that they ensure intertemporal consistency: consumption-portfolio plans (for the future) are in fact executed (in the future) - assuming that there is perfect foresight about relevant endogenous variables. This note proposes an alternative to expected utility, one which also delivers consistency between plan and execution - and more. In particular, it turns out that one special case is in fact simply discounted (subjective) expected utility. Moreover, this alternative formulation affords an extremely natural setting for introducing extrinsic uncertainty. The key idea behind my approach is to divorce the concept of filtration (of the state space) from any considerations involving probability (on the state space), and then concentrate attention on nested utilities of consumption looking forward from any date-event: utility today depends only on consumption today and prospective utility of consumption tomorrow, utility tomorrow depends only on consumption tomorrow and prospective utility of consumption the day after tomorrow, and so on.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.