Prospect Theory for Intertemporal Choice

Prospect theory is well understood in contexts without a time dimension. In intertemporal contexts, however, it is unclear how prospect theory should be applied. In particular, it is unclear whether probabilities should be weighted within time periods or whether probabilities of discounted utilities (or present values) of outcome streams should be weighted. Furthermore, it is unclear what parametric specifications of probability weighting and utility functions should be used. We find in a pre-registered experiment on a representative sample that weighting probabilities of discounted utilities (or present values) predicts decisions best. The estimated probability weighting functions are inverse-S shaped, and the utility functions are almost linear.