4- Intertemporal choice

Question 1

What is the formula for exponentially discounting utility streams?

Answer 1

u₀ + Σδᵗ uₜ

Question 2

What is the discount factor (δ)?

Answer 2

The weighting of future utility streams, higher figures imply greater patience

Question 3

How can you derive a discount factor from indifferent utility streams?

Answer 3

Equate utility streams and solve for δ

Question 4

What does rational intertemporal discounting imply for the discount factor over time?

Answer 4

The same discount factor should be used consistently over time

Question 5

How can you show whether a change in decisions over time is time-consistent?

Answer 5

1.Create 2 utility streams for each time period
2.Form an inequality of the streams in each period with that periods decision being preferred
3.Solve for delta and show whether it changes

Question 6

What is the formula for hyperbolically discounting utility streams?

Answer 6

u₀ + Σβ δᵗ uₜ

Question 7

What is present bias?

Answer 7

Tendency for immediate gratification that goes beyond pure exponential discounting

Question 8

What does beta (β) represent in Hyperbolic discounting?

Answer 8

The degree of present bias, lower figures imply higher impulsivity

Question 9

What are the 2 forms of hyperbolic discounting?

Answer 9

-Naive
-Sophisticated

Question 10

How does Naive hyperbolic discounting work?

Answer 10

Time-inconsistent individuals are not aware of their
time-inconsistency

Question 11

How does Sophisticated hyperbolic discounting work?

Answer 11

Time-inconsistent individuals make correct predictions w.r.t. their own time-inconsistent behaviour in the future

Question 12

What is the concept of preference for increasing utility profiles?

Answer 12

If people have the option to choose when to have pleasant and unpleasant events in time, they typically prefer to have unpleasant events earlier and pleasant events later

Question 13

What is the Peak-End rule?

Answer 13

The concept that people evaluate their utility based on the maximum utility and the last utility of the stream

Question 14

What is duration neglect?

Answer 14

Ignoring the total utility experienced over a period and instead evaluating based on other concepts such as the Peak-End rule

Question 15

How do sophisticated discounters treat decisions they know they’ll switch from in the future?

Answer 15

If they know they will switch to something else in the future then they will exclude the utility stream from their choice set as unfeasible

Question 16

How can you show a naive discounter will choose a certain option?

Answer 16

Show what they will pick at t=0, if they wait keep working through periods until they decide

Question 17

How can you show a sophisticated discounter will choose a certain option?

Answer 17

Work through what they would choose in each period, if their preferences change over time, exclude these preferences starting from the latest period and work backwards to find the final result

Question 18

How can you show an agent will regret their choice?

Answer 18

Show total utility is lower in final period than for other choice