Discounted Utility Model Analysis

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The Discounted Utility Model The expected utility (EU) and marked down utility (DU) models give simple access to the interconnected areas of time and instability. Parallel in structure, both models view chiefs as selecting between choices taking into account a weighted entirety of utilities, with the weights being either probabilities (for EU) or markdown elements in view of time deferrals (for DU). EU and DU have been connected to such various points as work supply, sparing conduct, wrongdoing, and fruitfulness, and keep on being comprehensively used as both engaging and standardizing models of decision in spite of developing feedback of their presumptions and suggestions and an assault of option details.…show more content…
The psychological foundation was given by John Rae in 1834. He identified two inhibiting factors they are:  the uncertainty of human life  the urge for instant gratification exacerbated by the prospect of immediate consumption From Rae’s work there were two different approaches developed by William Jevons and Herbert Jevons. Both approaches dealing with the importance of current feelings, but it also explained clearly about the differences in time preferences. Another imperative work done on intertemporal utility is by Bohm- Bawerk and Pigou. According to them people generally underestimate future wants in comparison of present wants due to the time preference factors. Irving Fisher he was the one who formalized and extended most of the works discussed earlier. In order to explain this theory he seeks the help of indifference curve and he also consider fashion as one factor along with the the four factors coined by Rae. The Discounted Utility Model was originaly proposed by Samuelson in his article named “A Note on Measurement of Utility” in…show more content…
Integration of new alternative with existing plan: From a normative point of view this argument has a logical characteristic also. According to this statement it says that people want to integrate a new alternative in order to maximize their welfare. People may not have a well planned schedule for their future plans related to their consumption pattern. They are unwilling to reformulate their plans every time according to the new plans encountered. Utility Independence: The Discounted Utility is the lump sum of the all discounted utilities in the future. People may prefer a flat or a rising utility profile in comparison to a falling one, or sometimes they may prefer a series of utility rather than a concentrated pattern. Consumption Independence: The main assumption of discounted utility model is that a person’s welfare in any time period is not depends upon his consumption activity in any other period. In broader sense the consumption independence says that the preference towards one thing is not depends up its consumption in previous time or the expectation of future consumption of that good. Stationary instantaneous

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