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Modeling nonmonotone preferences: The case of utility smoothing

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  • Wakai, Katsutoshi

Abstract

We propose a model of intertemporal choice in which a strong dislike of volatility involved in a utility sequence causes preferences to be nonmonotone. In particular, this notion of utility smoothing allows us to axiomatize a representation that captures an extreme dislike of losses. When applied to a consumption-saving problem, the nonmonotone preferences induced by our model never suggest a monotonically decreasing consumption profile. Furthermore, an optimal consumption sequence need not be monotonically increasing. Our model may suggest spreading large and small consumption allocations over time if the volatility involved in a utility sequence is sufficiently low.

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  • Wakai, Katsutoshi, 2011. "Modeling nonmonotone preferences: The case of utility smoothing," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 213-226, March.
    • Handle: RePEc:eee:mateco:v:47:y:2011:i:2:p:213-226
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    Cited by:

    1. Shigeta, Yuki, 2020. "Gain/loss asymmetric stochastic differential utility," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
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    3. Katsutoshi Wakai, 2013. "Intertemporal utility smoothing under uncertainty," Theory and Decision, Springer, vol. 74(2), pages 285-310, February.
    4. Wakai, Katsutoshi, 2012. "An infinite-horizon model of nonmonotone utility smoothing," Economics Letters, Elsevier, vol. 116(2), pages 170-173.

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