BE 2: Intertemporal Choices

  • Created by: charlie
  • Created on: 30-04-18 11:35
Standard discounted utility model
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Standard discounted utility model assumptions (3)
1) Time discounted at constant rate/ factor 2) Consumptions independent across periods 3) Stationarity of u (preferences dont change over time)
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Puzzle 1) Increasing discount factors
1) Present bias/ procrastination
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Patch 1) Hyperbolic discounting
1) Rational 2) Sophisticate 3) Naif
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Patch 1) Empirics: Savings + commitment
Savings increased for those assigned SEED (present bias) with take-up of 21% (sophisticates)
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Patch 1) Empirics: Exercise + health
People assigned 'incentive contract' dropped off after 1 month (present bias) with take-up of 12% for 'extra-pledge' (sophisticates)
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Patch 1) Empirics: Work effort
People increases effort closer to payday (present bias) with 75% setting a target amount to achieve (sophisticates)
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Patch 1) Empirics: Addictions (smoking)
People take-up commitment to stop smoking (sophisticates)
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Puzzle 2) Non present effect on consumption
Consumption is influenced by both your past consumption (habits/ reference points) and future projected consumption (anticipatory)
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Patch 2) Based on past consumption
1) Habit formation models 2) Reference point models
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Patch 2) Based on future consumption
1) Utility from anticipation
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Patch 2) Empirics: Future consumption equity premium puzzle
Premium for equity is unexpectedly high (due to anxious anticipation on your future returns)
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Patch 2) Empirics: Past consumption habits + reference points
1) Good habit formation (the more you save = the more you own) 2) Reference point (current wage utility depends on past earnings)
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Puzzle 3) Time changing utility
Preferences will change over time (not stationary)
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Patch 3) Viscreral influences (at the point in time)
Instantaneous utility incorporates endogenous visceral states (hunger/ sexual desires/ heat of moment/ cravings/ drug addiction...)
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Patch 3) Projection bias (predicting about future point)
People underappreciate degree to which present consumption surge raises your reference consumption level (due to visceral influences)
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Patch 3) Empirics: Affect of mood on stock returns
higher cloud cover = lower stock returns (preferences have changed due to exogenous weather shock)
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Patch 3) Empirics: Time varying risk aversion
watching scary film increases your risk aversion preferences despite no physical impact (preferences have changed due to emotional impact of film clip)
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Other cards in this set

Card 2

Front

Standard discounted utility model assumptions (3)

Back

1) Time discounted at constant rate/ factor 2) Consumptions independent across periods 3) Stationarity of u (preferences dont change over time)

Card 3

Front

Puzzle 1) Increasing discount factors

Back

Preview of the front of card 3

Card 4

Front

Patch 1) Hyperbolic discounting

Back

Preview of the front of card 4

Card 5

Front

Patch 1) Empirics: Savings + commitment

Back

Preview of the front of card 5
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