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Cognitive Procedures and Hyperbolic Discounting

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  • Nir, A.

    (Tilburg University, Center for Economic Research)

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    Abstract

    "Hyperbolic discount functions are characterized by a relatively high discount rate over short horizons and a relatively low discount rate over long horizons" (Laibson 1997).We suggest two cognitive procedures where individuals perceive future utility as decreasing at a decreasing rate as a function of time.Such a perception is similar to hyperbolic discounting.The first procedure shows that individuals hyperbolically discount marginal utility from money when they follow a cognitive procedure in which they believe that their wealth might increase or decrease in each future period under the constraint of a perceived small probability that wealth will decrease below its current level.The second procedure shows that individuals hyperbolically discount expected utility from consumption when they believe that they will rationalize their actions and thus alter their utility function over time.The difference in how perceived utility changes over the short and long horizon generates the hyperbolic discounting phenomenon.We find that greater tendencies toward rationalization and greater volatility in consumption increase the hyperbolic discounting phenomenon. Although hyperbolic disc ounting is usually regarded as impulsive and irrational, Azfar (1999) and this author suggest that hyperbolic discounting may be rational in some cases.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-47.

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    Date of creation: 2004
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    Handle: RePEc:dgr:kubcen:200447

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    Web page: http://center.uvt.nl

    Related research

    Keywords: cognitive process; preferences; bias; rationality; marginalism;

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    1. Nagler, Matthew G., 1993. "Rather bait than switch : Deceptive advertising with bounded consumer rationality," Journal of Public Economics, Elsevier, vol. 51(3), pages 359-378, July.
    2. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
    3. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    4. Rabin, Matthew, 1994. "Cognitive dissonance and social change," Journal of Economic Behavior & Organization, Elsevier, vol. 23(2), pages 177-194, March.
    5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
    6. Dickens, William T., 1986. "Crime and punishment again: The economic approach with a psychological twist," Journal of Public Economics, Elsevier, vol. 30(1), pages 97-107, June.
    7. Azfar, Omar, 1999. "Rationalizing hyperbolic discounting," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 245-252, February.
    8. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
    9. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    10. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
    11. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
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    Cited by:
    1. Sacha Bourgeois-Gironde & Itzhak Aharon, 2011. "From Neuroeconomics to Genetics: The Intertemporal Choices Case as an Example," Post-Print ijn_00713466, HAL.

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