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A general theory of time discounting: The reference-time theory of intertemporal choice

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Author Info
Ali al-Nowaihi ()
Sanjit Dhami ()

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Abstract

We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the generalized hyperbolic model (Loewenstein and Prelec 1992), the quasi-hyperbolic model (Phelps and Pollak 1968, Laibson 1997) and subadditivity of time discounting (Roelofsma and Read 2000, Read 2001 and Scholten and Read 2006a). These models are extended to allow for (i) reference points for time and wealth, and (ii) different discount functions for gains and losses. RT is able to account for all the 6 main anomalies of time discounting: gain-loss asymmetry, magnitude effect, common difference effect, delay-speedup asymmetry, apparent intransitivity of time preferences, and non-additivity of time discounting. We provide a class of utility functions compatible with RT. We show how RT can be extended to incorporate uncertainty and attribute models of intertemporal choice.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 08/22.

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Date of creation: Jul 2008
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Handle: RePEc:lec:leecon:08/22

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Related research
Keywords: Anomalies of the discounted utility model; Hyperbolic discounting; Prospect theory; gamma-delay; alpha-subadditivity; SIE value functions;

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Find related papers by JEL classification:
C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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  1. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05. [Downloadable!] (restricted)
  2. Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-62, June. [Downloadable!]
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