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Strotz meets Allais: Diminishing Impatience and the Certainty Effect

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  • Halevy, Yoram

Abstract

Decision makers tend to exhibit a higher degree of impatience when considering a delay to an immediate reward than when contemplating an identical delay to an equal future reward. This work argues that diminishing impatience originates from the distinction between the certain present and the risky future. A simple functional representation of preferences, which exhibits time inconsistency when the future is uncertain, is derived. Existing experimental evidence, which is inconsistent with other formulations that account for diminishing impatience, supports the proposed approach. Furthermore, the new theory uncovers a tight relation between diminishing impatience and well-known behavioral regularities in the field of choice under risk and uncertainty

Suggested Citation

  • Halevy, Yoram, 2004. "Strotz meets Allais: Diminishing Impatience and the Certainty Effect," Microeconomics.ca working papers yoram_halevy-2004-16, Vancouver School of Economics, revised 25 Feb 2014.
  • Handle: RePEc:ubc:pmicro:yoram_halevy-2004-16
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    File URL: http://faculty.arts.ubc.ca/yhalevy/disc-neu.pdf
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    More about this item

    Keywords

    Intertemporal Substitution; Non-Expected Utility; The Dual Theory; Certainty Effect; Time Consistency; Uncertain Lifetime; Exponential Discounting; Hy;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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