4. Choice and Time Flashcards
What is individual dynamic choice?
When there is extended time between determination of outcome and receipt of outcome or in the outcome itself
What is sequential choice?
When a choice is made at more than one point or uncertainty resolved at more than one point or resolution of uncertainty precedes choice
What is the orthodox economic answer to lifelong trade offs that individuals make between outcomes at different dates
Discounted utility model
What are the components of the discounted utility model?
Ut = w(t+j)u(Ct+j)
Where u(.) is instantaneous utility function
Where w(.) is weighting function, giving weights on utility in different periods viewed from period t w(t+j) = d^j where d is a discount parameter
Features of discounted utility model
-Additive separability of Ut
-Instantaneous utility function isn’t time dependent
-Weighting function isn’t time dependent or consumption dependent
-W(t+j) declines exponentially as j rises
-relative weight w(t+j+k)/w(t+j) is d^k
-for given d, it depends only incremental delay on k and is independent of baseline delay j
Is the discount rate constant in the data?
Studies suggest discount rate declines as j rises.
Evidence of sharp discounting of near future relative to present but less sharp discounting to very distant future relative to not quite as distant future. Think of this as diminishing marginal sensitivity to delay
How do people choose between smaller-sooner and larger-later options and which paper shows this?
Tendency to prefer smaller-sooner option when there is little/no baseline delay, but larger-later when there is a baseline delay
Keren & Roelofsma 1995
Components of hyperbolic discontinuing Loewenstein-Prelec form
W(t+j)= 1/(1+alpha x j)^(y/alpha)
Absolute weighted decline with j
Relative weight is increasing in baseline delay j and decreasing in incremental delay k. These fall sharply but then flatten out compared to exponential discounting
What are the two key features of quasi hyperbolic discounting?
Immediate future can be weighted much less than present
Discount rate declined progressively with baseline delay
Describe Laibsons quasi hyperbolic discounting model
Captures phenomenon of present bias without postulating a steadily declining discount rate. Very simple functional form which nests standard exponential model and is sometimes known as B-d preferences
What are the different psychological intuitions behind Laibsons quasi hyperbolic discounting?
Visceral attraction of present rather than diminishing marginal sensitivity to delay. Only the present is certain
Describe the quasi hyperbolic present bias model
Reduces to exponential model if beta =1.
Beta<1 reduces weight on all future periods by constant factor relative to exponential model with same discount rate
Relative weight is Bd^k when j=0 and d^k when j>0
Beta is an extra discount factor applying to future but only affecting comparisons involving the present
What is a possible welfare implication of the present bias model?
Decisions about allocation of expenditure between periods t and t+x should be taken before t arrives in order to avoid influence of present bias. This is an argument in favour of commitment strategies
Dynamic consistency
An agent sticks to and executes the plan she forms at the start
Forward looking consequential rationality
An agent is forward looking consequential if at each point she evaluates the remaining options
-treating bygones as bygones
-treating all feasible plans as possible choices and evaluating them by their outcomes
