Sopher, Barry and Sheth, Arnav (2006): A Deeper Look at Hyperbolic Discounting. Published in: Theory and Decision , Vol. 60, No. 2-3 (May 2006): pp. 219-255.
Download (158kB) | Preview
We conduct an experiment to investigate the degree to which deviations from exponential discounting can be accounted for by the hypothesis of hyperbolic discounting. Subjects are asked to choose between an earlier or later payoff in a series of 40 choice questions. Each question consists of a pair of monetary amounts determined by com- pounding a given base amount at a constant rate per period. Two bases (8 and 20 dollars), three compounding rates (low, medium and high) and three delays (2, 4, and 6 weeks) are each used. There are also 2 initial periods (Today and 2 weeks) and there are two separate questionnaires, one with lower “realistic” compounding rates and the other with higher compounding rates, typical of those used in previous studies. We ana- lyze the detailed patterns of choice in 6 groups of 6 related questions each (in which the base and rate is ﬁxed but the initial period and delay varies), documenting the frequency of patterns consistent with exponen- tial discounting and with hyperbolic discounting. We ﬁnd that exponen- tial discounting is the clear modal choice pattern in virtually all cases. Hyperbolic discounting is never the modal pattern (except in the sense that constant discounting is a special case of hyperbolic discounting). We also estimate a linear probability model that takes account of individual heterogeneity. The estimates show substantial increases in the probabil- ity of choosing the later option when the compounding rate increases, as one would expect. There are small, sometimes signiﬁcant, increases in this probability when the delay is increased or the initial period is in the future. Such behavior is consistent with hyperbolic discounting, but can account for only a small proportion of choices. Overall, deviations from exponential discounting appear to be due to error, or to other effects not accounted for by hyperbolic discounting. Principal among these is an increase in later choices when the base is larger.
|Item Type:||MPRA Paper|
|Original Title:||A Deeper Look at Hyperbolic Discounting|
|Subjects:||D - Microeconomics > D7 - Analysis of Collective Decision-Making > D71 - Social Choice; Clubs; Committees; Associations
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General
D - Microeconomics > D9 - Intertemporal Choice and Growth > D90 - General
D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles
B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology
|Depositing User:||Arnav Sheth|
|Date Deposited:||28. Jun 2008 03:54|
|Last Modified:||14. Feb 2013 13:39|
Ainslie, G. (1975), Specious reward: a behavioral theory of impulsiveness and impulse control, Psychological Bulletin 82, 463–496.
Ainslie, G. (1985), Beyond microeconomics. Conﬂict among interests in a multiple self as a determinant of value, In Elster, J. (ed.), The Multiple Self, Cambridge University Press, Cambridge.
Ainslie, G. and Haendel, V. (1983), The motives of will, In E Gotthell, K. Druley, T. Skoloda and H. Waxman, (eds.), Ethologici Aspects of Alcohol and Drug Abuse, Charles C. Thomas, Springﬁeld, IL.
Benzion, U., Rapoport, A. and Yagil, J. (1989), Discount rates inferred from decisions: An experimental study, Management Science 35, 270–284.
Fishburn, P. (1970), Utility Theory and Decision Making, Wiley, New York.
Fishburn, P. and Rubinstein, A. (1982), Time preference, International Economic Review 23, 677–694.
Fisher, I. (1930), The Theory of Interest as Determined by the Impatience to Spend Income and Opportunity to Invest in it, Macmillan, New York.
Hernstein, R. J. and Mazur, J. (1987), Making up our minds: A new model of economic behavior, The Sciences, Nov–Dec, 40–47.
Holcomb, J. and Nelson, P. S. (1992), Another experimental look at individual time preference, Rationality and Society 4(2), 199–220.
Horowitz, J. K. (1988), Discounting money payoffs: An experimental analysis, Working Paper, Department of Agricultural and Resource Economics, University of Maryland.
Koopmans, T. (1960), Stationary ordinary utility and impatience, Econometrica 28, 287–309.
Lancaster, K. (1963), An axiomatic theory of consumer time preference, International Economic Review 4, 221–231.
Loewenstein, G. and Prelec, D. (1992), Anomalies in intertemporal choice: Evidence and an interpretation, The Quarterly Journal of Economics 107(2), 573–597.
Loewenstein, G. and Prelec, D. (1993), Preference for sequences of outcomes, Psychological Review 100(1), 91–108.
Loewenstein, G. and Thaler, R. (1989), Anomalies: Intertemporal choice, Journal of Economic Perspective 3, 181–193.
Mischel, W. (1966), Theory and research on the antecedence of self-imposed delay of reward, Progress In Experimental Personality Research 3, 85–132.
Mischel, W. (1974), Processes in delay of gratiﬁcation, In Berkowitz, L. (ed.), Advances in Experimental Social Psychology, Academic Press, New York.
Mischel, W. and Ebbenson, E. (1970), Attention and delay of gratiﬁcation, Journal of Personality and Social Psychology 16, 329–337.
Rachlin, H. (1975), Introduction to Modern Behaviorism, Freeman, San Francisco.
Rachlin, H. (1974), Self-control, Behaviorism 2, 94–107.
Strotz, R. H. (1955), Myopia and inconsistency in dynamic utility maximization, Review of Economic Studies 8, 165–180.
Thaler, R. (1981), Some empirical evidence on dynamic inconsistency, Economics Letters, 8, 201–207.