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Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility
- Publication date
- 1 January 2006
- Publisher
- This paper is the first to measure utility in intertemporal choice and presents new and more
robust evidence on the discounting of money outcomes. Our measurement method is parameterfree
in the sense that it requires no assumptions about utility or discounting. We found that
intertemporal utility was concave for gains and convex for losses, consistent with a hypothesis
put forward by Loewenstein and Prelec (1992). Utility in intertemporal choice was close to
utility in decision under risk and uncertainty, suggesting that there may be one unifying concept
of utility that applies to all of economics. The existence of one concept of utility is important for
applied economics, because it largely reduces data requirements. Discount rates declined over
time, but less so than has been observed in previous studies that assumed linear utility. Of the
main discounted utility models, Loewenstein and Prelec’s (1992) generalized hyperbolic
discounting model best fitted our data. The widely-used quasi-hyperbolic model fitted the data
only slightly better than constant discounting. Finally, we obtained evidence of an asymmetry in
discounting between gains and losses, which, in contrast with earlier findings, cannot be
explained by a framing effect.