Term structure of psychological interest rates: A behavioral test
AbstractA lot of empirical and behavioral studies underline the idea of a non-flat term structure of subjective interest rates with a decreasing slope. Using an empirical test, this paper aims at identifying in individual behaviors whether agents see their psychological value of time decreasing or not. We show that the subjective interest rate follows a negatively sloped term structure. It can be parameterized using two variables, one specifying the instantaneous time preference, the other characterizing the slope of the term structure. A trade-off law called “balancing pressure law” is identified between these two parameters. We show that the term structure of psychological rates depends strongly on gender, but appears not to be linked with life expectancy. We also question the cross relationship between risk aversion and time preference. From a theoretical point of view, these two variables stand as two different and independent dimensions of choice. However, empirically, both time preference attitude and slope seem directly influenced by risk attitude.
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Date of creation: Nov 2010
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Publication status: Published - Presented, Southern Finance Association 2010 Conference, 2010, Ashville, USA, United States
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hyperbolic discounting; time preference; behavioral economics; psychological time value; risk aversion;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-CBE-2010-11-27 (Cognitive & Behavioural Economics)
- NEP-NEU-2010-11-27 (Neuroeconomics)
- NEP-UPT-2010-11-27 (Utility Models & Prospect Theory)
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