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A general theory of time discounting: The reference-time theory of intertemporal choice

By Ali al-Nowaihi and Sanjit Dhami

Abstract

We develop a general theory of intertemporal choice: the reference-time theory,\ud RT. RT is a synthesis of ideas from the generalized hyperbolic model (Loewenstein\ud and Prelec 1992), the quasi-hyperbolic model (Phelps and Pollak 1968, Laibson 1997)\ud and subadditivity of time discounting (Roelofsma and Read 2000, Read 2001 and\ud Scholten and Read 2006a). These models are extended to allow for (i) reference\ud points for time and wealth, and (ii) di¤erent discount functions for gains and losses.\ud RT is able to account for all the 6 main anomalies of time discounting: gain-loss\ud asymmetry, magnitude e¤ect, common di¤erence e¤ect, delay-speedup asymmetry,\ud apparent intransitivity of time preferences, and non-additivity of time discounting.\ud We provide a class of utility functions compatible with RT. We show how RT can be\ud extended to incorporate uncertainty and attribute models of intertemporal choice

Topics: Anomalies of the discounted utility model, Hyperbolic discounting, Prospect theory, γ-delay, α-subadditivity, SIE value functions
Publisher: Dept. of Economics, University of Leicester
Year: 2008
OAI identifier: oai:lra.le.ac.uk:2381/7526

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