Decision Making When Things Are Only a Matter of Time
Operations Research · 2020 · Volume 68 · Issue 5
Abstract
This article gives a comprehensive treatment of preferences regarding time risk—the risk of something happening sooner or later—within the expected discounted utility model. We characterize the signs of the discount function’s derivatives of all orders and show how these signs are decisive for time risk preferences. We introduce the notions of prudent and temperate discounting and illustrate their importance for economic behavior. Several applications in which an important event is “only a matter of time” are presented. The seminal net present value rule to evaluate investment opportunities is generalized to take into account the timing uncertainty of cash flows.
Keywords
decision analysis: applications, criteria, risk, theory, Decision Analysis, risk preferences, time preferences, time risk preferences, prudence, precautionary behavior, investment
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