Range Utility Theory for Uncertain Cash-flows

Abstract

We introduce range utility theory, an integrative behavioral model for uncertain cash flows. The model modifies rank dependent utility, by replacing rank principles with range principles, and extends the domain to time. For gambles played in the future, the model generalizes the probability and time trade-off model. The model comes with three functions: a value function, a subjective survival function for time and an s-shaped range distortion function, and. Range Utility Theory jointly explains the Samuelson paradox for risk and time, the preference reversal phenomenon, and hyperbolic discounting; and produces many novel testable predictions.