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A general theory of time discounting: The reference-time theory of intertemporal choice

  • Ali al-Nowaihi

    ()

  • Sanjit Dhami

    ()

We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the generalized hyperbolic model (Loewenstein and Prelec 1992), the quasi-hyperbolic model (Phelps and Pollak 1968, Laibson 1997) and subadditivity of time discounting (Roelofsma and Read 2000, Read 2001 and Scholten and Read 2006a). These models are extended to allow for (i) reference points for time and wealth, and (ii) different discount functions for gains and losses. RT is able to account for all the 6 main anomalies of time discounting: gain-loss asymmetry, magnitude effect, common difference effect, delay-speedup asymmetry, apparent intransitivity of time preferences, and non-additivity of time discounting. We provide a class of utility functions compatible with RT. We show how RT can be extended to incorporate uncertainty and attribute models of intertemporal choice.

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File URL: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp08-22.pdf
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 08/22.

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Date of creation: Jul 2008
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Handle: RePEc:lec:leecon:08/22
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
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  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.
  2. Ali al-Nowaihi & Sanjit Dhami, 2008. "A value function that explains the magnitude and sign effects," Discussion Papers in Economics 08/31, Department of Economics, University of Leicester.
  3. Ali al-Nowaihi & Sanjit Dhami, 2010. "Probability Weighting Functions," Discussion Papers in Economics 10/10, Department of Economics, University of Leicester.
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