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Allais meets Strotz: Remarks on the relation between Present Bias and the Certainty Effect

Listed author(s):
  • Chakraborty, Anujit
  • Halevy, Yoram

The paper establishes a tight relation between non-standard behaviors in the domains of risk and time by considering a decision maker with non-expected utility preferences who believes that only present consumption is certain while any future consumption is uncertain. We provide the first complete characterization of the two-way relations between i) certainty effect and present bias, and, ii) common ratio effect and the common difference effect. A corollary to our results is that hyperbolic discounting implies the Common Ratio Effect and that quasi-hyperbolic discounting implies the Certainty Effect.

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File URL: http://faculty.arts.ubc.ca/yhalevy/disc-neu-reply.pdf
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Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number yoram_halevy-2015-7.

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Length: 15 pages
Date of creation: 07 Feb 2015
Date of revision: 03 Nov 2016
Handle: RePEc:ubc:pmicro:yoram_halevy-2015-7
Contact details of provider: Web page: http://www.economics.ubc.ca/

References listed on IDEAS
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  1. 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.
  2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
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