Characteristics of the Term Structure of Psychological Discount Rate

Abstract

The discounted utility theory is one of the corner stone of financial theory; particularly in inter-temporal asset pricing and portfolio management. The questioning of this theory 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 time preferences. One improvement is related to the refining of the knowledge on the psychological discount rate function that underlies inter-temporal choices. Thus, an individual time preferences may be characterized by various discounting function such as exponential, Hernstein, Harvey, proportional, Laibson, Rachlin, Hyperbolic or generalized Hyperbolic discounting function. Empirical validation of these psychological discount rate term structures proposed to explain individual preferences and the distribution of their parameters in a given population has been subject to number of recent studies. The aim of this paper is to study empirically the form and parameters of psychological discount rate functions that characterized a given population. Based on the data collected through an experimental study, the violation of the discounted utility theory is confirmed, that mean that time preferences could not be characterized by an exponential discounting 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 an heterogeneity of the psychological discount rate functions.