Abstract
This paper discusses the rationality in an intertemporal dynamic choice under human psychological biases through numerical experiments. A decision maker tries to find the optimal choice in a financial problem by maximizing the subjects’ expected utility for multiple periods, which is measured by the value function in the prospect theory. The subjects are assumed to be myopic for monetary reward and show time-inconsistent preference. Additionally, they have different risk tolerances for gains and losses, causing the framing effect. Under these conditions, a comparative analysis is carried out numerically to evaluate a combined effect of the two psychological factors on the intertemporal choice. The paper also presents a simple computational method for the numerical analysis and proves its validity.
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