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Consumption and Risk with hyperbolic discounting

Author

Listed:
  • Liutang Gong

    (University of Beijing)

  • William Smith

    (Department of Economics, Fogelman)

  • Heng-fu Zou

    (University of Beijing
    World Bank)

Abstract

Hyperbolic discounting is not observationally equivalent to exponential discounting. It is always possible to calibrate an exponential model so that it predicts the same level of consumption as a hyperbolic model. However, the two models have radically different comparative statics.

Suggested Citation

  • Liutang Gong & William Smith & Heng-fu Zou, 2007. "Consumption and Risk with hyperbolic discounting," CEMA Working Papers 491, China Economics and Management Academy, Central University of Finance and Economics.
  • Handle: RePEc:cuf:wpaper:491
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    References listed on IDEAS

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    1. Per Krusell & Anthony A. Smith, Jr., "undated". "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
    2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    3. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, pages 119-158.
    4. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
    5. Simon Johnson, 2000. "Tunneling," American Economic Review, American Economic Association, pages 22-27.
    6. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
    7. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    8. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-957, July.
    9. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
    10. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    11. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Citations

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    Cited by:

    1. 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.
    2. Łukasz Balbus & Kevin Reffett & Łukasz Woźny, 2015. "Time consistent Markov policies in dynamic economies with quasi-hyperbolic consumers," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(1), pages 83-112, February.
    3. Liutang Gong & William Smith & Heng-fu Zou, 2007. "Asset Prices and Hyperbolic Discounting," Annals of Economics and Finance, Society for AEF, vol. 8(2), pages 397-414, November.
    4. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Sequeira, 2014. "Exponential discounting bias," Journal of Economics, Springer, pages 31-57.
    5. Greene, David L., 2011. "Uncertainty, loss aversion, and markets for energy efficiency," Energy Economics, Elsevier, vol. 33(4), pages 608-616, July.
    6. Y. Hossein Farzin & Ronald Wendner, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model — Hyperbolic Discounting and Observational Equivalence," Graz Economics Papers 2013-05, University of Graz, Department of Economics.
    7. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Sequeira, 2014. "Exponential discounting bias," Journal of Economics, Springer, pages 31-57.
    8. Palacios Huerta, Ignacio & Pérez Kakabadse, Alonso, 2013. "Consumption and portfolio rules whit stochastic hyperbolic discounting," IKERLANAK Ikerlanak;2013-72, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    9. Amanda King & John King, 2011. "Golden eggs versus plastic eggs: hyperbolic preferences and the persistence of debit," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 93-103, January.

    More about this item

    Keywords

    Consumption; Uncertainty; Hyperbolic discounting;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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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