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Increasing elasticity of the value function in the Loewenstein-Prelec theory of intertemporal choice

Author

Listed:
  • Ali al-Nowaihi

    ()

  • Sanjit Dhami

    ()

Abstract

In a critique of the Loewenstein and Prelec (1992) theory of intertemporal choice, al-Nowaihi and Dhami (2006) point out to four errors. One of the alleged errors was that the value function in prospect theory is decreasing. But it is in fact increasing. We provide a correction and a formal proof. As a corollary, we show that the elasticity of the value function is bounded between zero and one. Nevertheless, all the remaining points in al-Nowaihi and Dhami (2006) remain valid.

Suggested Citation

  • Ali al-Nowaihi & Sanjit Dhami, 2007. "Increasing elasticity of the value function in the Loewenstein-Prelec theory of intertemporal choice," Discussion Papers in Economics 07/13, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:07/13
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    File URL: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp07-13.pdf
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    as
    1. al-Nowaihi, Ali & Dhami, Sanjit, 2006. "A note on the Loewenstein-Prelec theory of intertemporal choice," Mathematical Social Sciences, Elsevier, vol. 52(1), pages 99-108, July.
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    Keywords

    Anomalies of the DU model; Intertemporal choice; Generalized hyperbolic discounting;

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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