Allais meets Strotz: Remarks on the relation between Present Bias and the Certainty Effect
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.
|Date of creation:||07 Feb 2015|
|Date of revision:||03 Nov 2016|
|Contact details of provider:|| Web page: http://www.economics.ubc.ca/|
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- Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
- Yoram Halevy, 2008.
"Strotz Meets Allais: Diminishing Impatience and the Certainty Effect,"
American Economic Review,
American Economic Association, vol. 98(3), pages 1145-1162, June.
- 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.
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