intertemporal choices Flashcards
What are the three key assumptions of the standard Discounted Utility Model?
- Time is discounted at a constant rate (exponential discounting).
- Intertemporal independence of consumption (utility in one period doesn’t depend on consumption in another).
- Stationary utility function (same activity yields same utility in any period).
What is hyperbolic discounting and how does it differ from exponential discounting?
Hyperbolic discounting uses a present-bias parameter β < 1: D(k) = 1 for k=0, and D(k) = βδ^k for k>0. Unlike exponential discounting, it implies steeper discounting for the near future, leading to time-inconsistent preferences.
What is the present bias parameter β in quasi-hyperbolic discounting?
It captures how much individuals disproportionately value the present over the future. A lower β indicates stronger present bias and more time-inconsistent behaviour.
How does Tanaka, Camerer & Nguyen (2010) measure present bias and time preferences?
They used experimental tasks offering choices between smaller-sooner and larger-later monetary rewards. Estimated β ≈ 0.644 showed present bias. Wealthier individuals were more patient (lower discount rate), but present bias was universal.
What is the Habit Formation Model and how does it modify intertemporal utility?
It suggests current utility depends on past consumption levels. This explains persistent consumption patterns and is used to model addiction and asset pricing anomalies like the equity premium puzzle.
How does the Habit Formation Model explain the equity premium puzzle?
Habit-adjusted consumption varies more than regular consumption. Small consumption fluctuations create large changes in habit-adjusted utility, justifying higher equity premiums with moderate risk aversion.
What are the key concepts in the Rational Model of Addiction (Becker & Murphy, 1988)?
It models addictive behaviour as rational: utility depends on current consumption and a stock of past consumption. Concepts include tolerance (utility from current consumption falls as stock rises) and reinforcement (marginal utility rises with stock).
What is adjacent complementarity in the Rational Model of Addiction?
Consumption in one period increases the desire for consumption in adjacent periods. Past and current use of an addictive good raise future consumption due to habit-forming behaviour.
What are the behavioural types in O’Donoghue & Rabin (1999) and how do they differ?
Time-Consistent agents follow exponential discounting. Naifs are time-inconsistent and unaware of future self-control issues. Sophisticates are time-inconsistent but anticipate their future behaviour and may use commitment devices.
How do Naifs and Sophisticates behave differently in intertemporal decisions?
Naifs procrastinate repeatedly due to incorrect expectations of future self-control. Sophisticates anticipate procrastination and may act earlier or seek commitment devices to avoid worse outcomes.
What did Ashraf, Karlan & Yin (2006) find about commitment savings in the Philippines?
28.4% of those offered a commitment savings product took it up. These individuals, especially hyperbolic discounters and women, increased savings balances by 81%. Marketing alone had no effect.
What was the design of Royer, Stehr & Sydnor (2015)’s gym commitment experiment?
Three groups: Control, Incentive-only, and Incentive+Commitment. The commitment group maintained higher gym attendance after incentives ended, showing that self-funded commitment devices support habit formation.
What were the findings of Giné, Karlan & Zinman (2010) on smoking cessation?
Offering CARES commitment contracts increased smoking cessation by ~3.5–5.8% at 6–12 months. No effect from cue cards. Results support the use of commitment contracts to build healthy habits.
What are alternative models to stationarity in intertemporal utility?
- Multiple-Selves Model (conflict between farsighted and myopic selves).
- Temptation Utility (disutility from resisting immediate pleasure).
- Projection Bias (overestimating stability of future preferences).
