Topic 4 - Part 1: Intertemporal Choice Flashcards
Intertemporal choices relate to decisions involving trade-offs between costs and benefits occurring in different …. periods.
time
The basic premise of the discounted utility model (DUM) is that people prefer money ……. rather than ……
sooner / later
DUM=Exponential discounting
Also called exponential discounting.
Combines utility from each period to one measure of overall utility, by adding together the utility from each time period and giving less weight to …….. utility
future
The value of the discount factor (hence, discount rate) is just
a ……… matter, and the theory says nothing about which
values are rational.
personal
if discount is high (close to 1), the person exhibits …….., be
cause she doesnt discount her future very much;
patience
If discount is low (close to 0), the person exhibits ………, she
discounts her future very heavily
impatience
DUM requires you to consistently apply … discount factor.
one
A person evaluates new alternatives by ……… them with
ones existing plans.
integrating (INTEGRATION OF NEW ALTERNATIVES WITH EXISTING PLANS)
A persons well-being in period t + k is …………. of her consumption in any other period
independent (CONSUMPTION INDEPENDENCE)
The cardinal instantaneous utility function u(ct) is ……. over time
constant (STATIONARY INSTANTANEOUS UTILITY)
All forms of consumption, costs and benefits, discounted at ….. rate.
same (INDEPENDENCE OF DISCOUNTING FROM CONSUMPTION)
At any period of time people use …. discount rate for all
future periods. This assumption means that delaying or accelerating two
dated outcomes by a common amount should not change
preferences between the outcomes.
same (CONSTANT DISCOUNTING)
Diminishing marginal utility motivates a person to …….
consumption over time, while positive time preference motivates a person to ………….. consumption in the present.
spread / concentrate (DIMINISHING MARGINAL UTILITY AND POSITIVE
TIME PREFERENCE)
Empirically observed discount rates are not constant over
time, but appear to ……..
decline
people are impatient overthe short term but more patient over the long term.This is an example to the best documented DU anomaly: ……….. …………
hyperbolic discounting
The larger the sum of money, the larger the estimated
discount factor, suggesting people are more patient for larger
amounts. This is called the ……… ………. ……….
absolute magnitude effect
There is a gain-loss asymmetry: the estimated discount
factor is ……. for gains than for losses.
smaller
a preference for an ……….. sequence. Subjects generally visit the aunt first and then friends later
improving
Savouring and dread
For gains, improving sequences allow decision makers to savour the best outcome until the end of the sequence. With losses, getting undesirable out
comes over with quickly eliminates dread.
Adaptation and loss aversion
If people adapt to the most recent level of stimuli they experience (hence, update their reference points), then improving sequences will provide a continual series of positive departures (gains) from their adaptation level, whereas declining sequences provide a series of relative losses
preferring the fancy French dinner on the third weekend, if that was the only
fancy dinner in the pro le, but preferring the fancy French dinner on the 1st weekend if the profile contained another fancy dinner. This result can be explained by the desire to spread consumption over time which is not consistent with DUM. This can be called the …………. … ……
preference for spread
