Intertemporal choice

Question 1

Relates to decisions involving..?

Answer 1

Trade-offs between costs and benefits occurring in different time periods

Question 2

Discounted utility

Answer 2

The utility of a future event as perceived at the present time, not the time of its occurrence

Question 3

Discounted utility model

Answer 3

Combines all the physiological factors involved in time preference into a single parameter of the discount rate
Incorporates the general axioms of the standard model
Imposes a constant discount rate

Question 4

Preference for improving sequences with example

Answer 4

Preference for improving sequences goes against DUM prediction, which discounts later outcomes more heavily
Model lacks descriptive and normative validity
eg. Workers prefer increasing wage profiles (Loewenstein, 1991)

Question 5

A front-end delay is used to control for confound between…

Answer 5

Pure time preference effects and future transaction costs

Question 6

Hyperbolic discounting assumes that…

Answer 6

People are more impatient in the short-run, using a higher discount rate, becoming more patient over longer periods of time - present bias
Inconsistent time preferences

Question 7

Lack of self-awareness affecting behaviour

Answer 7

Naivety
Future preferences = current preferences
No learning from past experience or changing preferences
Think they will use constant discount rate but will discount hyperbolically

Question 8

Self-awareness affecting behaviour

Answer 8

Sophisticated
Accurately predict how preferences will change over time
Can pre-commit to actions that prevent them from yielding to a preference reversal later

Question 9

Seminar 4

Answer 9

Children become more patient as they grow older
Girls are more patient than boys
More patience with front end-delay

Question 10

Time consistency

Answer 10

If one stream of rewards has a greater present value than another at one point in time, it will have a greater present value at any other point in time

Question 11

Discount rate

Answer 11

The interest rate at which future utilities are discounted

Question 12

Discount factor

Answer 12

How much each period’s utility is multiplied by to calculate the present value of the utility

Question 13

Anomlies in the DUM

Answer 13

Sign effect - gains are discounted more than losses
Magnitude effect - large outcomes are discounted at a lower rate than small ones

Question 14

β

Answer 14

Discount rate
Measures the degree of present bias
β<1 = discount factor between current period and the next is lower than in later periods
β=1 = quasi-hyperbolic function reduces to the exponential function of the DUM - D(t)=β^t

Question 15

Quasi-hyperbolic discounting formula

Answer 15

discount rate x discount factor^time-period remaining x value

Question 16

DUM formula

Answer 16

discount factor ^time period remaining x value