Increasing elasticity of the value function in the Loewenstein-Prelec theory of intertemporal choice
AbstractIn a critique of the Loewenstein and Prelec (1992) theory of intertemporal choice, al-Nowaihi and Dhami (2006) point out to four errors. One of the alleged errors was that the value function in prospect theory is decreasing. But it is in fact increasing. We provide a correction and a formal proof. As a corollary, we show that the elasticity of the value function is bounded between zero and one. Nevertheless, all the remaining points in al-Nowaihi and Dhami (2006) remain valid.
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Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 07/13.
Date of creation: Oct 2007
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Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-27 (All new papers)
- NEP-HPE-2007-10-27 (History & Philosophy of Economics)
- NEP-UPT-2007-10-27 (Utility Models & Prospect Theory)
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- Ali al-Nowaihi & Sanjit Dhami, 2005.
"A Note On The Loewenstein-Prelec Theory Of Intertemporal Choice,"
Discussion Papers in Economics, Department of Economics, University of Leicester
05/18, Department of Economics, University of Leicester.
- al-Nowaihi, Ali & Dhami, Sanjit, 2006. "A note on the Loewenstein-Prelec theory of intertemporal choice," Mathematical Social Sciences, Elsevier, Elsevier, vol. 52(1), pages 99-108, July.
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