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

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  • Chakraborty, Anujit
  • Halevy, Yoram

Abstract

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.

Suggested Citation

  • Chakraborty, Anujit & Halevy, Yoram, 2015. "Allais meets Strotz: Remarks on the relation between Present Bias and the Certainty Effect," Microeconomics.ca working papers yoram_halevy-2015-7, Vancouver School of Economics, revised 03 Nov 2016.
  • Handle: RePEc:ubc:pmicro:yoram_halevy-2015-7
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    File URL: http://faculty.arts.ubc.ca/yhalevy/disc-neu-reply.pdf
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    References listed on IDEAS

    as
    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. 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.
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    Cited by:

    1. Daniele Pennesi, 2017. "Uncertain discount and hyperbolic preferences," Theory and Decision, Springer, vol. 83(3), pages 315-336, October.

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    More about this item

    Keywords

    hyperbolic discounting; present bias; non-expected utility; prospect theory; common ratio effect;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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