Uncertainty and Hyperbolic Discounting
AbstractWe propose an evolutionary explanation for the pattern of intertemporal preference reversals often ascribed to "hyperbolic discounting." We take the view that preferencesâmanifested, for example, in urges, cravings, and inclinationsâ are the outcome of evolutionary forces, and so will induce animals or humans to make survival-maximizing choices in "typical" decision problems. We show that if the typical problem involves payoffs whose realization times are uncertain, then optimal preferences give rise to relatively patient behavior when the time horizon is long but induce a switch to impatience when the horizon grows short. Such reversals do not entail dynamic inconsistency in typical decision problems; behavior there is optimal. However, if a decision-maker is confronted with a choice for which the realization-time uncertainty falls outside the evolutionary norm, her preferences may well prompt her to behave inconsistently. We argue that, if such a choice problem recurs, her evolutionarily endowed aability to learn will lead her to make self-commitments against these urges.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 95 (2005)
Issue (Month): 4 (September)
Other versions of this item:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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