IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v189y2020ics0022053118305295.html
   My bibliography  Save this article

Weighted discounting—On group diversity, time-inconsistency, and consequences for investment

Author

Listed:
  • Ebert, Sebastian
  • Wei, Wei
  • Zhou, Xun Yu

Abstract

This paper presents the class of weighted discount functions, which contains the discount functions commonly used in economics and finance. Weighted discount functions may describe the discounting behavior of groups, uncertainty about what discount rate to use, present-biased time preferences, and all of these simultaneously. As an application, we study investment behavior under weighted discounting and come up with the following general result: Greater group diversity, greater parameter uncertainty, and more present-biased time preferences lead to delayed investment or, equivalently, more risk-taking.

Suggested Citation

  • Ebert, Sebastian & Wei, Wei & Zhou, Xun Yu, 2020. "Weighted discounting—On group diversity, time-inconsistency, and consequences for investment," Journal of Economic Theory, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053118305295
    DOI: 10.1016/j.jet.2020.105089
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053118305295
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2020.105089?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Charles Harvey, 1995. "Proportional Discounting of Future Costs and Benefits," Mathematics of Operations Research, INFORMS, vol. 20(2), pages 381-399, May.
    2. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    3. Grenadier, Steven R. & Wang, Neng, 2007. "Investment under uncertainty and time-inconsistent preferences," Journal of Financial Economics, Elsevier, vol. 84(1), pages 2-39, April.
    4. Falk, A. & Becker, A. & Dohmen, T.J. & Enke, B. & Huffman, D. & Sunde, U., 2015. "The nature and predictive power of preferences: Global evidence," Research Memorandum 039, Maastricht University, Graduate School of Business and Economics (GSBE).
    5. Burak Güner, A. & Malmendier, Ulrike & Tate, Geoffrey, 2008. "Financial expertise of directors," Journal of Financial Economics, Elsevier, vol. 88(2), pages 323-354, May.
    6. Mohammed Abdellaoui & ArthurE. Attema & Han Bleichrodt, 2010. "Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility," Economic Journal, Royal Economic Society, vol. 120(545), pages 845-866, June.
    7. Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
    8. Drazen Prelec, 2004. "Decreasing Impatience: A Criterion for Non‐stationary Time Preference and “Hyperbolic” Discounting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 511-532, October.
    9. Patrick L. Brockett & Linda L. Golden, 1987. "A Class of Utility Functions Containing all the Common Utility Functions," Management Science, INFORMS, vol. 33(8), pages 955-964, August.
    10. Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(4), pages 1149-1174.
    11. Christopher Harris & David Laibson, 2013. "Instantaneous Gratification," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(1), pages 205-248.
    12. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
    13. Giannetti, Mariassunta & Zhao, Mengxin, 2019. "Board Ancestral Diversity and Firm-Performance Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 1117-1155, June.
    14. Menezes, Carmen F. & Wang, X.Henry, 2005. "Increasing outer risk," Journal of Mathematical Economics, Elsevier, vol. 41(7), pages 875-886, November.
    15. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 185-199.
    16. John K.-H. Quah & Bruno Strulovici, 2013. "Discounting, Values, and Decisions," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 896-939.
    17. Fahlenbrach, Rüdiger, 2009. "Founder-CEOs, Investment Decisions, and Stock Market Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 439-466, April.
    18. Adams, Renée B. & Ferreira, Daniel, 2009. "Women in the boardroom and their impact on governance and performance," Journal of Financial Economics, Elsevier, vol. 94(2), pages 291-309, November.
    19. Karp, Larry, 2007. "Non-constant discounting in continuous time," Journal of Economic Theory, Elsevier, vol. 132(1), pages 557-568, January.
    20. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    21. Fishburn, Peter C., 1980. "Continua of stochastic dominance relations for unbounded probability distributions," Journal of Mathematical Economics, Elsevier, vol. 7(3), pages 271-285, December.
    22. Hara, Chiaki, 2008. "Complete monotonicity of the representative consumer's discount factor," Journal of Mathematical Economics, Elsevier, vol. 44(12), pages 1321-1331, December.
    23. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    24. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 573-597.
    25. Ebert, Sebastian, 2015. "On skewed risks in economic models and experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 85-97.
    26. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    27. Tomas Björk & Agatha Murgoci & Xun Yu Zhou, 2014. "Mean–Variance Portfolio Optimization With State-Dependent Risk Aversion," Mathematical Finance, Wiley Blackwell, vol. 24(1), pages 1-24, January.
    28. Stephen A. Marglin, 1963. "The Social Rate of Discount and The Optimal Rate of Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 77(1), pages 95-111.
    29. Joel M. Vanden, 2015. "General Properties Of Isoelastic Utility Economies," Mathematical Finance, Wiley Blackwell, vol. 25(1), pages 187-219, January.
    30. Charles M. Harvey, 1986. "Value Functions for Infinite-Period Planning," Management Science, INFORMS, vol. 32(9), pages 1123-1139, September.
    31. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(3), pages 165-180.
    32. Daehyun Kim & Laura T. Starks, 2016. "Gender Diversity on Corporate Boards: Do Women Contribute Unique Skills?," American Economic Review, American Economic Association, vol. 106(5), pages 267-271, May.
    33. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    34. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
    35. repec:dau:papers:123456789/2326 is not listed on IDEAS
    36. Millner, Antony & Heal, Geoffrey, 2018. "Time consistency and time invariance in collective intertemporal choice," Journal of Economic Theory, Elsevier, vol. 176(C), pages 158-169.
    37. Arthur E. Attema & Han Bleichrodt & Yu Gao & Zhenxing Huang & Peter P. Wakker, 2016. "Measuring Discounting without Measuring Utility," American Economic Review, American Economic Association, vol. 106(6), pages 1476-1494, June.
    38. Ronald W. Masulis & Cong Wang & Fei Xie, 2007. "Corporate Governance and Acquirer Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1851-1889, August.
    39. 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.
    40. Matthew O. Jackson & Leeat Yariv, 2014. "Present Bias and Collective Dynamic Choice in the Lab," American Economic Review, American Economic Association, vol. 104(12), pages 4184-4204, December.
    41. Kenneth R. Ahern & Amy K. Dittmar, 2012. "The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 137-197.
    42. Christopher P. Chambers & Federico Echenique, 2018. "On Multiple Discount Rates," Econometrica, Econometric Society, vol. 86(4), pages 1325-1346, July.
    43. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    44. Yoram Halevy, 2015. "Time Consistency: Stationarity and Time Invariance," Econometrica, Econometric Society, vol. 83, pages 335-352, January.
    45. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    46. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    47. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
    48. Thistle, Paul D., 1993. "Negative Moments, Risk Aversion, and Stochastic Dominance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 301-311, June.
    49. repec:dau:papers:123456789/78 is not listed on IDEAS
    50. Paul A. Samuelson, 1937. "A Note on Measurement of Utility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 4(2), pages 155-161.
    51. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    52. Bleichrodt, Han & Rohde, Kirsten I.M. & Wakker, Peter P., 2009. "Non-hyperbolic time inconsistency," Games and Economic Behavior, Elsevier, vol. 66(1), pages 27-38, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2022. "Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting," Journal of Economic Theory, Elsevier, vol. 204(C).
    2. Erhan Bayraktar & Zhenhua Wang & Zhou Zhou, 2023. "Equilibria of time‐inconsistent stopping for one‐dimensional diffusion processes," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 797-841, July.
    3. Phoebe Koundouri & Georgios I. Papayiannis & Electra Petracou & Athanasios Yannacopoulos, 2023. "Consensus group decision making under model uncertainty with a view towards environmental policy making," DEOS Working Papers 2305, Athens University of Economics and Business.
    4. Yu-Jui Huang & Zhou Zhou, 2022. "A time-inconsistent Dynkin game: from intra-personal to inter-personal equilibria," Finance and Stochastics, Springer, vol. 26(2), pages 301-334, April.
    5. Xue Dong He & Xun Yu Zhou, 2021. "Who Are I: Time Inconsistency and Intrapersonal Conflict and Reconciliation," Papers 2105.01829, arXiv.org.
    6. Shuoqing Deng & Xiang Yu & Jiacheng Zhang, 2023. "On time-consistent equilibrium stopping under aggregation of diverse discount rates," Papers 2302.07470, arXiv.org, revised Dec 2023.
    7. Zongxia Liang & Fengyi Yuan, 2021. "Weak equilibria for time-inconsistent control: with applications to investment-withdrawal decisions," Papers 2105.06607, arXiv.org, revised Jun 2023.
    8. Zongxia Liang & Fengyi Yuan, 2023. "Weak equilibria for time‐inconsistent control: With applications to investment‐withdrawal decisions," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 891-945, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antony Millner & Geoffrey Heal, 2015. "Collective intertemporal choice: time consistency vs. time invariance," GRI Working Papers 220, Grantham Research Institute on Climate Change and the Environment.
    2. Chiaki Hara, 2019. "Heterogeneous Impatience of Individual Consumers and Decreasing Impatience of the Representative Consumer," KIER Working Papers 1009, Kyoto University, Institute of Economic Research.
    3. Drouhin, Nicolas, 2020. "Non-stationary additive utility and time consistency," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 1-14.
    4. Arthur E. Attema & Han Bleichrodt & Kirsten I. M. Rohde & Peter P. Wakker, 2010. "Time-Tradeoff Sequences for Analyzing Discounting and Time Inconsistency," Management Science, INFORMS, vol. 56(11), pages 2015-2030, November.
    5. Han Bleichrodt & Yu Gao & Kirsten I. M. Rohde, 2016. "A measurement of decreasing impatience for health and money," Journal of Risk and Uncertainty, Springer, vol. 52(3), pages 213-231, June.
    6. Laurent Denant-Boemont & Enrico Diecidue & Olivier l’Haridon, 2017. "Patience and time consistency in collective decisions," Experimental Economics, Springer;Economic Science Association, vol. 20(1), pages 181-208, March.
    7. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2022. "Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting," Journal of Economic Theory, Elsevier, vol. 204(C).
    8. Mikhail Pakhnin, 2021. "Collective Choice with Heterogeneous Time Preferences," CESifo Working Paper Series 9141, CESifo.
    9. Nicolas Drouhin, 2016. "Non stationary additive utility and time consistency," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01238584, HAL.
    10. Galizzi, Matteo M. & Miraldo, Marisa & Stavropoulou, Charitini & van der Pol, Marjon, 2016. "Doctor–patient differences in risk and time preferences: A field experiment," Journal of Health Economics, Elsevier, vol. 50(C), pages 171-182.
    11. Wojciech Rybicki, 2012. "Discounting and ideas of intergenerational equity and sustainability," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 22(1), pages 63-84.
    12. Murat Yilmaz, 2018. "An Extended Survey of Time-Inconsistency and Its Applications," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 32(1), pages 55-73.
    13. Christopher P. Chambers & Federico Echenique & Alan D. Miller, 2023. "Decreasing Impatience," American Economic Journal: Microeconomics, American Economic Association, vol. 15(3), pages 527-551, August.
    14. Tian, Yuan, 2016. "Optimal capital structure and investment decisions under time-inconsistent preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 83-104.
    15. Daniele Pennesi, 2017. "Uncertain discount and hyperbolic preferences," Theory and Decision, Springer, vol. 83(3), pages 315-336, October.
    16. Kirsten I. M. Rohde, 2019. "Measuring Decreasing and Increasing Impatience," Management Science, INFORMS, vol. 65(4), pages 1700-1716, April.
    17. Millner, Antony & Healey, Andrew, 2018. "Discounting by committee," LSE Research Online Documents on Economics 90246, London School of Economics and Political Science, LSE Library.
    18. Tangren Feng & Shaowei Ke, 2018. "Social Discounting and Intergenerational Pareto," Econometrica, Econometric Society, vol. 86(5), pages 1537-1567, September.
    19. Millner, Antony & Heal, Geoffrey, 2018. "Discounting by committee," Journal of Public Economics, Elsevier, vol. 167(C), pages 91-104.
    20. Epper, Thomas, 2015. "Income Expectations, Limited Liquidity, and Anomalies in Intertemporal Choice," Economics Working Paper Series 1519, University of St. Gallen, School of Economics and Political Science.

    More about this item

    Keywords

    Diversity; Hyperbolic discounting; Investment; Parameter uncertainty; Time inconsistency; Weighted discounting;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053118305295. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.