Abstract
We study finite horizon consumption and portfolio decisions of time-inconsistent individuals by incorporating the stochastic hyperbolic preferences of Harris and Laibson (2013) into the classical model of Merton (1969, 1971) with constant relative risk aversion (CRRA). We obtain closed-form solutions for optimal consumption and portfolio choices for sophisticated individuals with log utility and numerical solutions for those with power utility. Compared to the results of Merton, we find that stochastic hyperbolic discounting increases the consumption rate but has no effect on the share of wealth invested in the risky asset.
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.
