Viewing the Future through a Warped Lens: Why Uncertainty Generates Hyperbolic Discounting
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Date
2010-09
Publication Type
Working Paper
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Abstract
A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and signicant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people's proneness to probability distortions.
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published
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510
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University of Zurich, Institute for Empirical Research in Economics
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Subject
Time preferences; Risk preferences; Hyperbolic discounting; Probality weighting; Institutionally generated uncertainty
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03361 - Schubert, Renate (emeritus) / Schubert, Renate (emeritus)
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