Modeling nonmonotone preferences: The case of utility smoothing

We propose a model of intertemporal choice in which a strong dislike of volatility involved in a utility sequence causes preferences to be nonmonotone. In particular, this notion of utility smoothing allows us to axionnatize a representation that captures an extreme dislike of losses. When applied to a consumption-saving problem, the nonmonotone preferences induced by our model never suggest a monotonically decreasing consumption profile. Furthermore, an optimal consumption sequence need not be monotonically increasing. Our model may suggest spreading large and small consumption allocations over time if the volatility involved in a utility sequence is sufficiently low. (C) 2011 Elsevier B.V. All rights reserved.