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The term structure of psychological discount rate: characteristics and functional forms

OUATTARA, Aboudou and DE LA BRUSLERIE, Hubert (2015): The term structure of psychological discount rate: characteristics and functional forms.

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The discounted utility theory is a cornerstone of financial theory, particularly in inter-temporal asset pricing and portfolio management. This theory questioning has opened a whole field of research in psychology, economics, and management, and has undergone several enhancements recently. Its violation seems widely established and opened the way for the building of a more efficient framework to understand the individual time preferences. One improvement is related to the refining of the knowledge on the psychological discount function that underlies inter-temporal choices. In fact, an individual’s time preferences may be characterized by various discount functions such as the exponential, Hernstein, Harvey, proportional, Laibson, Rachlin, hyperbolic and generalized hyperbolic discount functions. Empirical validation of these proposed psychological discount rate term structures to explain individual preferences and the distribution of their parameters in a given population has been the subject of a number of recent studies. These researches have insufficiently question the problem of the validity of the proposed function on a given population. The aim of this research is to empirically study the shape and parameters of psychological discount functions that characterized a given population. Based on the data collected through an experimental study, the violation of the discounted utility theory is confirmed, which means that time preferences could not be characterized by an exponential discount function. This finding is consistent with other empirical studies and shows that the population is characterized by a decreasing impatience. In addition, it shows that the population is characterized by a heterogeneity of the psychological discount functions.

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