1. Intertemporal Choice - SS200 Behavioural Economics
- 21 January 2004 by Martin Barner

2. Papers Frederick, Loewenstein & O’Donoghue:
”A review of intertemporal choice” (2002)
Angeletos, Laibson, Repetto, Tobacman & Weinberg:
”The hyperbolic consumption model” (2001)
Laibson:
”Golden eggs and hyperbolic discounting” (1997)

3. Agenda Motivation History of intertemporal choice
Anomalies from discounted utility theory
Two examples of hyperbolic discounting
Results of simulations in Angeletos et al
Conclusions and perspectives

4. Motivation
What is analyzed
Why care
What to learn
Citation

5. History of intertemporal choice
Adam Smith (1776)
John Rae (1834)
Eugen von Böhm-Bawerk (1889)
Irving Fisher (1930)
Paul Samuelson (1937)
Robert Strotz (1956)
Phelps and Pollak (1968)
David Laibson (1994, 1997)

6. Discounted Utility Model
Discount rate expresses motives
Accepted as normative and descriptive
Utility and consumption independence
Time consistency
Opposing forces
Diminishing marginal utility
Positive time preference

7. Definitions Time discounting Reason for caring less about future
Time preference
Immediate utility over delayed utility

8. Anomalies from DU Empirically discount rates not constant Over time
Across type of intertemporal choices
Sign effect (gains vs. losses)
Magnitude effect (small vs. large amounts)
Sequence effect (sequence vs. singly)

9. Figure 1: - from Frederick et al,

10. Figure 2: - from Frederick et al,

11. Hyperbolic discounting
Declining rate of time preference

12. Example 1: ”Golden eggs and hyperbolic discounting”
Substancial benefit in long run…
…But temptation in short run
Illiquid assets provide commitment
Two-thirds of American wealth illiquid
Not counting human capital
Access to credit reduce commitment
Explain decline in savings rate 1980s

13. Figure 3: - from Laibson ,

14. Example 2: ”The hyperbolic consumption model”
Long run intentions and short run actions
Hyperbolic preferences induce dynamic inconsistency
Sophisticated consumers
Model with simulations

15. Example 2 (continued) Model features uncertain future labour income
liquidity constraint
allow to borrow on credit cards - limit
hyperbolic discounting – implications
labour income autocorrelated – shocks
hold liquid and illiquid assets
Results

16. Figure 4: - from Angeletos et al,

17. Figure 5: - from Angeletos et al,

18. Figure 6: - from Angeletos et al,

19. Figure 7: - from Angeletos et al,

20. Table 1: - from Angeletos et al,

21. Table 2: - from Angeletos et al,

22. Conclusion Use insight from psychology
Relinguish finding the right discount rate
Intertemporal choice reflects considerations
Descriptively adequate models are not easy
Not general theory – degrees of freedom

23. Behavioural perspectives
Other models (instantaneous utility function)
Habit formation
Reference point models
Visceral influence
Projection bias
Multiple self