Weighted Discounting On Group Diversity, Time-Inconsistency, and Consequences for Investment

Abstract

Listen

Translate article

This paper studies groups whose members disagree about the method of discounting. In particular, we provide a comprehensive treatment of discount functions that are given by the weighted average of the group members’ discount functions. This class of “weighted discount functions” admits a natural notion of group diversity, which has consequences for behavior. We show that more diverse groups discount less heavily and make more patient decisions. Within a real options framework, for example, greater group diversity leads to delayed investment. Finally, we show that well-known behavioral discount functions can be written as a weighted discount function. Therefore, all results in this paper find a correspondence in a single agent setting with non-standard, behavioral time preferences. In particular, we provide an equilibrium optimal stopping result for individuals who are aware of their time-inconsistency, but lack commitment.