4. Time and Risk Preferences Flashcards
Intertemporal choice
Decisions with consequences that play out over time are ubiquitous
How does a rational decision maker make intertemporal choices?
They compare the present and future utilities and choose the one that maximises net discounted utility
Theory of the exponentional discounting model
- discounting between two equally spaced points in time is the same
- there is a constant discount rate
- size and sign of £ doesn’t matter
What did early results on discounting find? (Thaler Econ letters 1981)
- discount rates decline in time (hyperbolic discounting)
- decrease in the size of cash flow (magnitude effect)
- lower discount rates for losses
Present biased
People weigh the present greater than the future
Multiple selves explanation
- since people change their preferences over time, it can be modelled as a game that multiple selves play against each other
- only if self is an exponential discounter will they have the same self throughout
What are the four commitment strategies?
- self deployed situational
- self deployed cognitive
- other deployed situational
- other deployed cognitive
Examples of self deployed strategies
- routines
- temptation bundling
- behavioural therapy
- psychological distancing
- self imposed norms
- telling other people goals
Examples of other deployed strategies
- descriptive social norms
- social labelling
- self licensing
- hard paternalism- e.g. compulsory education
How can we measure risk preferences?
- By finding a point of indifference between a sure and a risky payment
- We can simply ask people how risky they are
Variables which make you more risk averse
- female
- older
- shorter
- uneducated parents
Cognitive reflection test
A set full of questions such as bat and ball question.
How is cognitive reflection test correlated with intelligence, patience and riskiness
They are all positively correlated
