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Non-constant Quasi-hyperbolic Discounting

Author

Listed:
  • Ling PENG

    (School of Management, Guizhou University)

  • William W. HAGER

    (University of Florida)

Abstract

This paper puts forward a non-constant quasi-hyperbolic (NQH) discount function which can control the switch point of preference reversal in a flexible way. A non-standard Hamilton-Jacobi-Bellman (HJB) equation enables us to produce time-consistent solution under stochastic non-constant quasi-hyperbolic (SNQH) discounting. The sophisticated individual, the naïve individual and the pre-committed individual are compared analytically and numerically.

Suggested Citation

  • Ling PENG & William W. HAGER, 2017. "Non-constant Quasi-hyperbolic Discounting," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 51(2), pages 145-164.
    • Handle: RePEc:cys:ecocyb:v:50:y:2017:i:2:p:145-164
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    References listed on IDEAS

    as
    1. Karp, Larry, 2005. "Non-Constant Discounting in Continuous Time," Institute for Research on Labor and Employment, Working Paper Series qt0nn1t22z, Institute of Industrial Relations, UC Berkeley.
    2. Caliendo, Frank N., 2011. "Time-inconsistent preferences and social security: Revisited in continuous time," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 668-675, May.
    3. Christopher Harris & David Laibson, 2013. "Instantaneous Gratification," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(1), pages 205-248.
    4. Zou, Ziran & Chen, Shou & Wedge, Lei, 2014. "Finite horizon consumption and portfolio decisions with stochastic hyperbolic discounting," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 70-80.
    5. Matthew O. Jackson & Leeat Yariv, 2015. "Collective Dynamic Choice: The Necessity of Time Inconsistency," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 150-178, November.
    6. Karp, Larry, 2007. "Non-constant discounting in continuous time," Journal of Economic Theory, Elsevier, vol. 132(1), pages 557-568, January.
    7. Marín-Solano, Jesús & Navas, Jorge, 2010. "Consumption and portfolio rules for time-inconsistent investors," European Journal of Operational Research, Elsevier, vol. 201(3), pages 860-872, March.
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    Cited by:

    1. Peng, Ling & Kloeden, Peter E., 2021. "Time-consistent portfolio optimization," European Journal of Operational Research, Elsevier, vol. 288(1), pages 183-193.

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    More about this item

    Keywords

    preference reversal; time-consistent solution; sophisticated individual; naïve individual; pre-committed individual.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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