Discounted Utility Model Propounded By John Rae
Name-Drishti Priya Roll No.-1422024 Course-3MAECO Discounted Utility Model
Introduction:
The Discounted Utility Model is the concept which was identified and hence, propounded by John Rae in the year 1834. He was the first to bring into light the “want of accumulation.” This want may be advanced by the motive (or utility) of bequest along with the propensity of self-reliant characteristics. This propensity and the utility of bequest are also observed by the constraint of uncertainty in the event of death leading
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They also exhibited how the underestimation of the same my lead to anomalies. The formal theory was further put forward by Irving Fisher. Samuelson in the year 1937 introduced the Discounted Utility Model.
The DUM hold great importance in the utility study of economics because it not only explores or introduces the intertemporal choices but also this model brings out the empirical authority and eligibility as well as implied the relevance of the function of the intertemporal choices of utility study.
The intertemporal choices of the utility model is said to have a hand in the allocation of resources over a period of time. The analyzing of this utility had problems which lead to Samuelson proposing an answer and solution by the method of summation of the weighted decision rule.
One of the distinct features that characterize this model is the independence of utility. For example, the sequence of utility (U(C_t),…..,U(C_T )), in the model will have the same discounting factor (1,…..,δ^(T-t) ) irrespective of the dispersion of utility over any time period.
Features of the Discounted Utility Model Integrating New Alternatives and Existing
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This method makes use of both real or hypothetical rewards (benefits) and costs. The rewards/cost may not necessarily have to be in terms of money, it may involve, accounting for or gauging for the health conditions or estimating a degree of comforts and discomforts. There is a high probability of the sample to respond more closely to what they would in the real life situations, where concerns the decision making. Following are the methods involved in the experimental procedural analysis: Choice tasks
This method is used most commonly under the experimental studies, for legitimating the rates of discount. The rewards are to be chosen in the criteria of: --- the larger the reward the more it will be in the future --- the smaller the reward the nearer it will be in the present
This method accounts for the highest threshold and the lowest threshold. Matching Tasks
Here the analysis sees equivalence in the two intertemporal choices made by the subject. Of the two responses, the accounting for the accurate discounting rate can be made eliminating the need of
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