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Hyperbolic Discounting and the Standard Model

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  • Jawwad Noor

    ()
    (Department of Economics, Boston University)

Abstract

Experiments on time preference document numerous .ndings that seem to con- tradict the standard model of intertemporal choice. These .ndings are based on how subjects choose between delayed rewards. This paper shows that if subjects integrate such rewards with their consumption plans, and expect changes in future consump- tion, then except for violations of basic properties like transitivity, the standard model (with CRRA utility) can rationalize all the popular experimental .ndings: preference reversals, dynamic inconsistency, hyperbolic discounting, magnitude e¤ect, sign e¤ect, delay-speedup asymmetry etc. It is demonstrated formally that the standard model has no peculiar testable implications for subjects.preferences between delayed money rewards, which is the data of typical experiments. A testable implication of the model is derived in the richer setting with risky prospects as rewards.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-028.

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Length: 33pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:bos:wpaper:wp2007-028

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Keywords: Discounted Utility; Exponential discounting; Preference Reversals; Dy- namic Inconsistency; Hyperbolic discounting; Sign E¤ect; Magnitude E¤ect.;

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References

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Cited by:
  1. Barton L. Lipman & Wolfgang Pesendorfer, 2010. "Temptation," Boston University - Department of Economics - Working Papers Series WP2010-021, Boston University - Department of Economics.
  2. Sutter, Matthias & Kocher, Martin G. & Glätzle-Rützler, Daniela & Trautmann, Stefan T., 2010. "Impatience and Uncertainty: Experimental Decisions Predict Adolescents' Field Behavior," IZA Discussion Papers 5404, Institute for the Study of Labor (IZA).
  3. Paola Manzini & Marco Mariotti, 2007. "Choice over Time," Working Papers 605, Queen Mary, University of London, School of Economics and Finance.
  4. Tatom, John, 2007. "Is Tax Policy Retarding Growth in Morocco?," MPRA Paper 6011, University Library of Munich, Germany.
  5. Halevy, Yoram, 2004. "Strotz meets Allais: Diminishing Impatience and the Certainty Effect," Microeconomics.ca working papers halevy-04-10-29-10-08-43, Vancouver School of Economics, revised 25 Feb 2014.
  6. Anke Gerber & Kirsten I.M. Rohde, 2009. "Eliciting Discount Functions when Baseline Consumption changes over Time," Tinbergen Institute Discussion Papers 09-103/1, Tinbergen Institute, revised 24 Feb 2010.

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