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Hyperbolic Discounting and the Standard Model

Author

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  • Jawwad Noor

    (Department of Economics, Boston University)

Abstract

Experiments on time preference document numerous .ndings that seem to con- tradict the standard model of intertemporal choice. These .ndings are based on how subjects choose between delayed rewards. This paper shows that if subjects integrate such rewards with their consumption plans, and expect changes in future consump- tion, then except for violations of basic properties like transitivity, the standard model (with CRRA utility) can rationalize all the popular experimental .ndings: preference reversals, dynamic inconsistency, hyperbolic discounting, magnitude e¤ect, sign e¤ect, delay-speedup asymmetry etc. It is demonstrated formally that the standard model has no peculiar testable implications for subjects.preferences between delayed money rewards, which is the data of typical experiments. A testable implication of the model is derived in the richer setting with risky prospects as rewards.

Suggested Citation

  • Jawwad Noor, 2007. "Hyperbolic Discounting and the Standard Model," Boston University - Department of Economics - Working Papers Series WP2007-028, Boston University - Department of Economics.
    • Handle: RePEc:bos:wpaper:wp2007-028
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    Cited by:

    1. Matthias Sutter & Martin G. Kocher & Daniela Glätzle-Rützler & Stefan T. Trautmann, 2013. "Impatience and Uncertainty: Experimental Decisions Predict Adolescents' Field Behavior," American Economic Review, American Economic Association, vol. 103(1), pages 510-531, February.
    2. Tatom, John, 2007. "Is Tax Policy Retarding Growth in Morocco?," MPRA Paper 6011, University Library of Munich, Germany.
    3. Manzini, Paola & Mariotti, Marco, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute of Labor Economics (IZA).
    4. Noor, Jawwad, 2009. "Decreasing impatience and the magnitude effect jointly contradict exponential discounting," Journal of Economic Theory, Elsevier, vol. 144(2), pages 869-875, March.
    5. Manzini, Paola & Mariotti, Marco, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute of Labor Economics (IZA).
    6. Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-1162, June.
    7. Barton L. Lipman & Wolfgang Pesendorfer, 2010. "Temptation," Boston University - Department of Economics - Working Papers Series WP2010-021, Boston University - Department of Economics.
    8. repec:ubc:pmicro:halevy-04-10-29-10-08-43 is not listed on IDEAS

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    More about this item

    Keywords

    Discounted Utility; Exponential discounting; Preference Reversals; Dy- namic Inconsistency; Hyperbolic discounting; Sign E¤ect; Magnitude E¤ect.;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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