A Utility Function for Time Streams Having Inter-Period Dependencies

Abstract

A utility function that is separable over time cannot accurately reflect the preferences of a decision maker whose attitude toward risk in a given period of a time stream depends on the particular outcome in the previous and/or following period. In this paper we use conditional utility independence to give assumptions that do allow such preferences to be quantified. For a T-period time stream the result requires the assessment of T − 1 two-period utility functions and one scaling constant. If stationarity assumptions are appropriate, only one two-period utility function and two constants are required.

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