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Strotz Meets Allais: Diminishing Impatience and the Certainty Effect

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  • Yoram Halevy

Abstract

Decision makers tend to exhibit a higher degree of impatience when considering a delay to an immediate reward than when contemplating an identical delay to an equal future reward. This work argues that diminishing impatience originates from the distinction between the certain present and the risky future. A simple functional representation of preferences, exhibiting time inconsistency when the future is uncertain, is derived. Experimental evidence, which is inconsistent with other formulations that account for diminishing impatience, supports the proposed approach. The new theory uncovers a tight relation between diminishing impatience and well-known behavioral regularities in choice under risk and uncertainty.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.3.1145
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 3 (June)
Pages: 1145-62

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:1145-62

Note: DOI: 10.1257/aer.98.3.1145
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  1. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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  7. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
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  10. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
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