The Trojan Horse of Time-Risk Preference Representations
- Matthew Sobel
Risk and Optimization in an Uncertain World: Tutorials in Operations Research 2010, pp. 99-115, November 2010
Throughout the management sciences, individuals and organizations compare alternatives with consequences that are risky and unfold over time. This tutorial examines representations of preferences that are sensitive to timing and risk. It reviews the logical foundations of the two major contending representations and finds that each of them is self-contradictory. In particular, properties of preferences that are consistent with discounting are also consistent with risk neutrality. In this sense, discounting implies risk neutrality. Then the tutorial briefly examines the prospects of developing new representations that are logically consistent. The tutorial ends by applying the various representations to a model of a supply chain contract.