Abstract
This paper draws on recent developments in the theory of choice under uncertainty to model anomalies in intertemporal choice. Cognitive limitations leading to hyperbolic discounting and magnitude effects in intertemporal choice may be described in terms of bounded awareness, and represented by phenomena familiar from visualization software such as Google Earth. Cognitive limits on visualization impose constraints on both the area being viewed and the level of detail of the view, with a trade-off between the two. Increasing detail at the expense of limiting the area viewed may be described as zooming. Data from a field experiment were used to assess the theory with an incentive-compatible multiple price list approach involving magnitude levels of 5x, 10x and 20x the basic magnitude level with time horizons of one, three, six and 12 months. Without zooming adjustments in base consumption, very strong hyperbolic and magnitude effects were found, and present bias could not explain the hyperbolic effects. The zooming model provides an explanation of what appear to be significant intertemporal anomalies in the data.
Highlights
IntroductionAnomalies in intertemporal choice include hyperbolic discounting, quasi-hyperbolic discounting (present bias), and magnitude effects (Chung and Herrnstein 1967; Thaler 1981; Ainslie 1991; Loewenstein and Prelec 1992; Laibson 1997) and represent deviations from the well-known discounted utility model (Samuelson 1937)
Anomalies in intertemporal choice include hyperbolic discounting, quasi-hyperbolic discounting, and magnitude effects (Chung and Herrnstein 1967; Thaler 1981; Ainslie 1991; Loewenstein and Prelec 1992; Laibson 1997) and represent deviations from the well-known discounted utility model (Samuelson 1937).Magnitude effects in intertemporal choices in the form of systematically lower discount rates associated with prospects with larger monetary amounts appear as an accepted empirical regularity 1 with few convincing explanations
Such conscious discount rate adjustments seem very implausible and seem to lend support for an alternative explanation where varying the degree of asset integration systematically with prospect characteristics may be a reasonable alternative route
Summary
Anomalies in intertemporal choice include hyperbolic discounting, quasi-hyperbolic discounting (present bias), and magnitude effects (Chung and Herrnstein 1967; Thaler 1981; Ainslie 1991; Loewenstein and Prelec 1992; Laibson 1997) and represent deviations from the well-known discounted utility model (Samuelson 1937). Magnitude effects in intertemporal choices in the form of systematically lower discount rates associated with prospects with larger monetary amounts appear as an accepted empirical regularity 1 with few convincing explanations. It may not be explained by the functional form of the utility function and is called the Bincreasing proportional sensitivity property^ (Prelec and Loewenstein 1991). We present the results of experimental studies designed to test the zooming hypothesis
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
