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Discounting by Intervals: A Generalized Model of Intertemporal Choice

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  • Marc Scholten

    ()
    (Department of Social and Organizational Psychology, Instituto Superior de Psicologia Aplicada, Rua Jardim do Tabaco 34, 1149-041 Lisboa, Portugal)

  • Daniel Read

    ()
    (Durham Business School, Mill Hill Lane, Durham DH1 3LB, United Kingdom)

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    Abstract

    According to most models of intertemporal choice, an agent's discount rate is a function of how far the outcomes are removed from the present, and nothing else. This view has been challenged by recent studies, which show that discount rates tend to be higher the closer the outcomes are to one another (subadditive discounting) and that this can give rise to intransitive intertemporal choice. We develop and test a generalized model of intertemporal choice, the Discounting By Intervals (DBI) model, according to which the discount rate is a function of both how far outcomes are removed from the present and how far the outcomes are removed from one another. The model addresses past challenges to other models, most of which it includes as special cases, as well as the new challenges presented in this paper: Our studies show that when the interval between outcomes is very short, discount rate tends to increase with interval length (superadditive discounting). In the discussion we place our model and evidence in a broader theoretical context.

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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0534
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 52 (2006)
    Issue (Month): 9 (September)
    Pages: 1424-1436

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    Handle: RePEc:inm:ormnsc:v:52:y:2006:i:9:p:1424-1436

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    Related research

    Keywords: intertemporal choice; delay effort; subadditivity; superadditivity; intransitivity;

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    Cited by:
    1. Manzini, Paola & Mariotti, Marco, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute for the Study of Labor (IZA).
    2. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
    3. Marc Scholten & Daniel Read, 2006. "Beyond discounting: the tradeoff model of intertemporal choice," LSE Research Online Documents on Economics 22710, London School of Economics and Political Science, LSE Library.
    4. Ali al-Nowaihi & Sanjit Dhami, 2013. "A Theory of Reference Time," Discussion Papers in Economics 13/26, Department of Economics, University of Leicester.
    5. Takeuchi, Kan, 2011. "Non-parametric test of time consistency: Present bias and future bias," Games and Economic Behavior, Elsevier, vol. 71(2), pages 456-478, March.
    6. Mohammed Abdellaoui & Han Bleichrodt & Olivier l’Haridon, 2013. "Sign-dependence in intertemporal choice," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 225-253, December.
    7. Cruz Rambaud, Salvador & Muñoz Torrecillas, María José, 2013. "A generalization of the q-exponential discounting function," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(14), pages 3045-3050.
    8. McAlvanah, Patrick, 2010. "Subadditivity, patience, and utility: The effects of dividing time intervals," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 325-337, November.
    9. al-Nowaihi, Ali & Dhami, Sanjit, 2009. "A value function that explains the magnitude and sign effects," Economics Letters, Elsevier, vol. 105(3), pages 224-229, December.
    10. John R. Doyle, 2013. "Survey of time preference, delay discounting models," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(2), pages 116-135, March.
    11. Su, Yin & Rao, Li-Lin & Li, Xingshan & Wang, Yong & Li, Shu, 2012. "From quality to quantity: The role of common features in consumer preference," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1043-1058.
    12. Fabrizio Adriani & Silvia Sonderegger, . "Evolution of similarity judgements in intertemporal choice," Discussion Papers 2014-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    13. Bocquého, Géraldine & Jacquet, Florence & Reynaud, Arnaud, 2013. "Reversal and magnitude effects in long-term time preferences: Results from a field experiment," Economics Letters, Elsevier, vol. 120(1), pages 108-111.
    14. Yusuke Kinari & Fumio Ohtake & Yoshiro Tsutsui, 2009. "Time discounting: Declining impatience and interval effect," Journal of Risk and Uncertainty, Springer, vol. 39(1), pages 87-112, August.
    15. Ali al-Nowaihi & Sanjit Dhami, 2013. "Foundations and Properties of Time Discount Functions," Discussion Papers in Economics 13/27, Department of Economics, University of Leicester.

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