🤖 AI Summary
This study addresses the empirical validity of the discounted expected utility (DEU) model in risky intertemporal choice contexts by proposing a nonparametric revealed-preference test. The approach provides the first complete axiomatic characterization of DEU with concave utility, requiring no prior assumptions about the functional forms of either the utility or discount functions, thereby rendering the model empirically falsifiable. Applying this method to existing behavioral experimental data, the analysis reveals that the DEU model is overwhelmingly rejected across most settings, indicating its limited explanatory power in real-world decision-making. These findings underscore both the empirical utility and theoretical novelty of the proposed framework in identifying fundamental limitations of canonical models of intertemporal risk preferences.
📝 Abstract
We present a revealed preference characterization of the discounted expected utility model with a concave utility function. The characterization offers a nonparametric test of the model. We apply the test to an experimental data set in the literature and find that the model is almost always rejected even when all payments involved are subject to risk.