Discounting under impact of temporal risk aversion - a case of discrete time

Krzysztof Piasecki

Abstract

The main aim of this study is to describe temporal risk aversion impact on the present value. Here the case of discrete time is considered only. Some initial problem with differential equation is obtained as a result of these studies. Then the discounting function is given as the unique solution of this initial problem. The formal influence of risk aversion index on the discounting was pointed out. Among other things, there is proved that for fixed current discount rate the condition of present value temporal monotonicity is equivalent to the condition that temporal risk aversion index is positive. Moreover, there is shown that nominal discount rate increases with temporal risk aversion index. Obtained discounting model is applied to explain the behavioural paradox of conducting contradictory transactions under the same set of rational premises.