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Understanding time-inconsistent heterogeneous preferences in economics and finance: a practice theory approach

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  • Panagiotis Andrikopoulos

    (Coventry University)

  • Nick Webber

    (University of Birmingham)

Abstract

This paper introduces an innovative framework for decision making by individuals with inconsistent preferences. Practices, associations of individuals with a preference set shared by its members, provide context and unify preferences across an economy so that decision-makers are situated in social and economic structures. Our framework models the time evolution of certain attributes, emerging from the practice framework, that govern individuals’ decisions and their intertemporal variation. A novel feature is that preferences are able to rank other preference sets without the need to aggregate them. Instead, the selection of a preference set is treated as a decision in its own right. Our framework explains decision making paradoxes such as the disposition effect and agency cost considerations that are frequently encountered in the behavioural finance and economics literature.

Suggested Citation

  • Panagiotis Andrikopoulos & Nick Webber, 2019. "Understanding time-inconsistent heterogeneous preferences in economics and finance: a practice theory approach," Annals of Operations Research, Springer, vol. 282(1), pages 3-26, November.
    • Handle: RePEc:spr:annopr:v:282:y:2019:i:1:d:10.1007_s10479-018-2836-9
    DOI: 10.1007/s10479-018-2836-9
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    Cited by:

    1. Li, Jiangyuan & Liu, Bo & Yang, Jinqiang & Zou, Zhentao, 2020. "Hedge fund’s dynamic leverage decisions under time-inconsistent preferences," European Journal of Operational Research, Elsevier, vol. 284(2), pages 779-791.

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    More about this item

    Keywords

    Intertemporal choice; Time-inconsistent preferences; Multiple selves; Disposition effect; Decision theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G40 - Financial Economics - - Behavioral Finance - - - General

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