This research paper will survey models and experiments for decisions involving outcomes of different amounts at different points of time. Experiments have shown that people like to get rewards earlier than later in time. This is what the concept of Intertemporal choice implies. Thus, this paper will consider theoretical concepts including discounted utility, hyperbolic and quasy-hyperbolic models as well as empirical results indicating how people really make such decisions.
Table of Contents
1. Introduction
2. Discounted Utility Model
3. Eliciting methods and DU Anomalies
4. Hyperbolic and Quasy-hyperbolic Discounting
5. Applications and Further Experimental Analysis
6. Conclusion
Research Objectives and Topics
The research investigates the mechanisms of intertemporal decision-making, specifically analyzing how individuals discount the value of rewards over time. The primary objective is to evaluate the validity of the traditional Discounted Utility (DU) model against observed behavioral anomalies and to explore the descriptive power of hyperbolic and quasi-hyperbolic discounting models in explaining human preferences.
- Theoretical foundations of Discounted Utility (DU) and its limitations.
- Empirical identification of behavioral anomalies such as the magnitude effect and sign effect.
- Comparison of exponential, hyperbolic, and quasi-hyperbolic discounting functions.
- Impact of experimental elicitation methods on observed discount rates.
- Applications of time preference research in credit behavior, health choices, and economic decision-making.
Excerpt from the Book
Eliciting methods and DU Anomalies
First of all, experimental analyses have used different elicitation methods on how to elicit discounting. Methods of eliciting have their important role in better understanding how scientist have really found anomalies of DU and compared it with later developed intertemporal choice models. Numerous methods have been used to analyse whether there are controversies on how subjects discount rewards. An integrative review paper in discount rates between studies (Frederick et al., 2002) realized that 52% of studies used the so called choice-based measures, 31% used matching, and the rest of other methods amount to about 17%.
The Choice-based method contains a binary comparison of questions for participants and uses these to infer an indifference point that is later converted into a discount rate. Each question asks subjects to choose between a sooner and later reward. The sooner or immediate reward is usually smaller reward and the later is a larger reward. The options of sooner and smaller or later and larger have to contain the same goods to be compared or measured, typically amounts of money or other items of value.
Using such techniques, over the last three decades, empirical research on intertemporal choice has reviled various deviations from DU model assumption. The first observation documents that discount rates are not constantly discounted but appear to decline over time. Other empirical observations present that for given delays, discount rates fluctuate across different periods of time, and typically losses are discounted less than gains. Further, small amounts have been discounted more than large amounts, improving sequence and spread of preferred sequences have been favoured. Such anomalies show that already mentioned properties of the DU model have failed to meet with empirical results reviled.
Summary of Chapters
Introduction: Provides an overview of intertemporal choice, defining the core concept of tradeoffs over time and the role of various discounting models in economics.
Discounted Utility Model: Examines the normative framework of the DU model, its mathematical foundation, and the core assumptions regarding constant discount factors and utility independence.
Eliciting methods and DU Anomalies: Analyzes the empirical failures of the DU model, detailing behavioral deviations such as the magnitude effect, sign effect, and preference reversals.
Hyperbolic and Quasy-hyperbolic Discounting: Explores alternative mathematical models designed to better capture observed human behavior and present bias in decision-making.
Applications and Further Experimental Analysis: Discusses real-world implications of discounting research, including its links to credit behavior, substance abuse, and psychological factors.
Conclusion: Summarizes the current state of intertemporal choice research and the ongoing need for more flexible models to accurately represent human decision-making.
Keywords
Intertemporal Choice, Discounted Utility, Hyperbolic Discounting, Quasi-hyperbolic Discounting, Exponential Discounting, Time Preference, Magnitude Effect, Sign Effect, Preference Reversal, Present Bias, Behavioral Economics, Discount Rate, Consumption Utility, Decision Making, Empirical Analysis.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper explores how individuals make decisions involving outcomes at different points in time, evaluating the effectiveness of various mathematical models in predicting these choices.
What are the main thematic pillars of the work?
The core themes include the theoretical framework of Discounted Utility, the empirical evidence of behavioral anomalies, and the comparison between standard and hyperbolic discounting models.
What is the central research question addressed?
The research asks which discounting models best capture actual human behavior, given that the traditional Discounted Utility model frequently fails to account for observed empirical anomalies.
Which scientific methodologies are employed?
The paper relies on a survey of existing literature, meta-analysis of experimental results, and a comparison of mathematical functions used to calculate discount rates in economics and psychology.
What does the main body of the text cover?
It covers the mathematical derivation of discounting functions, detailed analysis of behavioral anomalies like the sign and magnitude effects, and an overview of applications in fields like credit behavior.
Which keywords best describe this study?
Key terms include Intertemporal Choice, Discounted Utility, Hyperbolic Discounting, Time Preference, and Present Bias.
Why does the traditional DU model often fail to predict real-world behavior?
The model assumes a constant discount rate and utility independence, which contradicts empirical findings showing that people often change their preferences as a deadline approaches, a phenomenon known as preference reversal.
How does "present bias" manifest in the discussed models?
Present bias refers to the tendency to overvalue immediate rewards compared to future ones; hyperbolic and quasi-hyperbolic models capture this by applying a steeper discount to the immediate future than to longer-term horizons.
What influence does the magnitude of a reward have on discounting?
The research notes a "magnitude effect" where smaller sums of money are typically discounted at significantly higher rates than larger amounts, a direct deviation from the predictions of the standard DU model.
How do external factors like physical appearance impact discount rates?
Specific experiments cited in the paper suggest that environmental stimuli, such as viewing attractive faces, can significantly increase the discount rates of subjects, indicating that decision-making is sensitive to non-economic factors.
- Arbeit zitieren
- PhD candidate Ilir Hajdini (Autor:in), 2012, Intertemporal Choices in Management Decision Making, München, GRIN Verlag, https://www.hausarbeiten.de/document/202566
