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Know Thyself: Self Awareness and Utility Misprediction in Discounting Models of Intertemporal Choice

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  • Savorelli, Luca

    () (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

Abstract

This review critically discusses the theoretical models of discounting through a selection of papers. It will focus on the comparison between the two major models, namely discounted utility and hyperbolic discounting. This paper differs from previous surveys in the attention given to the interpretation of models and suggestions for future research. First, it stresses how the economics literature is biased itself, since it considers only present-biased preferences on the basis of not well grounded evidence, while also future-biased preferences are worthwhile of attention to address relevant issues, like compulsive behaviors and work-life unbalance. Second, it makes qualifications on the meaning of self-awareness, distinguishing between cognitive boundaries and beliefs. Third, it suggests future direction of research to address this issue, fundamental for a sound policy analysis, by showing how the two main welfare criteria used in the literature to evaluate welfare of inconsistent individuals (long-run utility and Pareto criterion) have relevant shortcomings. Finally, it proposes a new perspective on misprediction of utility based on time perception

Suggested Citation

  • Savorelli, Luca, 2008. "Know Thyself: Self Awareness and Utility Misprediction in Discounting Models of Intertemporal Choice," AICCON Working Papers 57-2008, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
  • Handle: RePEc:ris:aiccon:2008_057
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    References listed on IDEAS

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    1. R. A. Pollak, 1968. "Consistent Planning," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 201-208.
    2. Goldman, Steven Marc, 1979. "Intertemporally Inconsistent Preferences and the Rate of Consumption," Econometrica, Econometric Society, vol. 47(3), pages 621-626, May.
    3. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
    4. Ted O'Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 121-160.
    5. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
    6. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
    7. Tirole, Jean, 2002. "Rational irrationality: Some economics of self-management," European Economic Review, Elsevier, vol. 46(4-5), pages 633-655, May.
    8. Read, Daniel, 2001. "Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
    9. Salanie, Francois & Treich, Nicolas, 2006. "Over-savings and hyperbolic discounting," European Economic Review, Elsevier, vol. 50(6), pages 1557-1570, August.
    10. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
    11. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1261-1303.
    12. Jevons, William Stanley, 1871. "The Theory of Political Economy," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number jevons1871.
    13. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    14. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
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    More about this item

    Keywords

    future - biased preferences; intertemporal choice; partial naivete; self - control; sophistication; time inconsistency;

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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