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Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting


Epper, Thomas; Fehr-Duda, Helga; Bruhin, Adrian (2011). Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting. Journal of Risk and Uncertainty, 43(3):169-203.

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
significant 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.

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
significant 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.

Citations

16 citations in Web of Science®
19 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2011
Deposited On:18 Jan 2012 10:01
Last Modified:05 Apr 2016 15:24
Publisher:Springer
ISSN:0895-5646
Additional Information:The original publication is available at www.springerlink.com
Publisher DOI:https://doi.org/10.1007/s11166-011-9129-x

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