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

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  • Ali al-Nowaihi
  • Sanjit Dhami

Abstract

We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the hyperbolic model and subadditivity of time discounting. These models are extended to allow for a reference point for time as well as wealth. 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.

Suggested Citation

  • Ali al-Nowaihi & Sanjit Dhami, 2008. "A general theory of time discounting: The reference-time theory of intertemporal choice," Discussion Papers in Economics 08/34, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:08/34
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    References listed on IDEAS

    as
    1. Ali al-Nowaihi & Sanjit Dhami, 2010. "Probability Weighting Functions," Discussion Papers in Economics 10/10, Division of Economics, School of Business, University of Leicester.
    2. al-Nowaihi, Ali & Dhami, Sanjit, 2009. "A value function that explains the magnitude and sign effects," Economics Letters, Elsevier, vol. 105(3), pages 224-229, December.
    3. 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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    Cited by:

    1. Upravitelev, A., 2023. "Neoclassical roots of behavioral economics," Journal of the New Economic Association, New Economic Association, vol. 58(1), pages 110-140.
    2. Ali al-Nowaihi & Sanjit Dhami, 2018. "Foundations for Intertemporal Choice," CESifo Working Paper Series 6913, CESifo.
    3. Ali al-Nowaihi & Sanjit Dhami, 2013. "Foundations and Properties of Time Discount Functions," Discussion Papers in Economics 13/27, Division of Economics, School of Business, University of Leicester.
    4. Ali al-Nowaihi & Sanjit Dhami, 2021. "Preferences over Time and under Uncertainty: Theoretical Foundations," CESifo Working Paper Series 9215, CESifo.
    5. Ali al-Nowaihi & Sanjit Dhami, 2013. "A Theory of Reference Time," Discussion Papers in Economics 13/26, Division of Economics, School of Business, University of Leicester.

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    More about this item

    Keywords

    Anomalies of the discounted utility model; Hyperbolic discounting; Prospect theory; gamma-delay; alpha-subadditivity; SIE value functions;
    All these keywords.

    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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