Spaces for agreement: a theory of Time-Stochastic Dominance
Working Paper 137
Many investments involve both a long time-horizon and risky returns. Making investment decisions thus requires assumptions about time and risk preferences. In the public sector in particular, such assumptions are frequently contested and there is no immediate prospect of universal agreement.
Motivated by these observations, we develop a theory and method of finding ‘spaces for agreement’. These are combinations of classes of discount and utility function, for which one investment dominates another (or ‘almost’ does so), so that all decision-makers whose preferences can be represented by such combinations would agree on the option to be chosen.
The theory is built on combining the insights of stochastic dominance on the one hand, and time dominance on the other, thus offering a non-parametric approach to inter-temporal, risky choice.
Simon Dietz and Anca N. Matei