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The time interpretation of expected utility theory

Decision theory is the model of individual human behavior employed by neoclassical economics. Built on this model of individual behavior are models of aggregate behavior that feed into models of macroeconomics and inform economic policy. Neoclassical economics has been fiercely criticized for failing to make meaningful predictions of individual and aggregate behavior, and as a consequence has been accused of misguiding economic policy. We identify as the Achilles heel of the formalism its least constrained component, namely the concept of utility. This concept was introduced as an additional degree of freedom in the 18th century when it was noticed that previous models of decision-making failed in many realistic situations. At the time, only pre-18th century mathematics was available, and a fundamental solution of the problems was impossible. We re-visit the basic problem and resolve it using modern techniques, developed in the late 19th and throughout the 20th century. From this perspective utility functions do not appear as (irrational) psychological re- weightings of monetary amounts but as non-linear transformations that define ergodic observables on non-ergodic growth processes. As a consequence we are able to interpret different utility functions as encoding different non-ergodic dynamics and remove the element of human irrationality from the explanation of basic economic behavior. Special cases were treated in [1]. Here we develop the theory for general utility functions.

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