In a major contribution, Loewenstein and Prelec (1992) (LP) set the foundations for the behavioral approach to decision making over time. We show that the LP theory is incompatible with two very useful classes of value functions: the HARA class and the constant loss aversion class. Resultingly, the LP theory has been used infrequently in applications, which have largely used the ß, ? form of hyperbolic preferences. We propose a more general but equally tractable class of utility functions, the simple increasing elasticity (SIE) class, which is compatible with constant loss aversion in a reformulated version of LP. Allowing for reference dependence and different discount rates for gains and losses the SIE class is able to explain impatience, gain-loss asymmetry, magnitude effect, and the delay-speedup asymmetry even under exponential discounting. If combined instead with the (reformulated) LP theory, the SIE class in addition can also explain the common difference effect.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
07/09.
Length: Date of creation: Sep 2007 Date of revision: Handle: RePEc:lec:leecon:07/9
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK Phone: +44 (0)116 252 2887 Fax: +44 (0)116 252 2908 Email: Web page: http://www.le.ac.uk/economics/
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: