2 - LEC 1 - TIME INCONSISTENCIES

Question 1

what is intertemporal choice

Answer 1

Outcomes distributed across time

Question 2

what are the psychological factors promoting the desire to accumulate

Answer 2

Bequest motive
Capacity for self-restraint
-Willpower to put long-term interests ahead of short-term ones

Question 3

what are the inhibiting factors to accumulate

Answer 3

The uncertainty of human life

The urge for instant gratification

Question 4

what’s the discount utility model

Answer 4

Question 5

what does the following look like:
per period discount factor
discount factor
discount rate

Answer 5

Question 6

what is the discount rate

Answer 6

Interest rate at which future utilities are discounted

When the discount rate is constant we have time-consistent preferences

Question 7

what is the discount factor

Answer 7

The proportion by which each period’s utility is multiplied to calculate present value of utility

Question 8

what’s the per period discount factor

Answer 8

Question 9

what does a discount factor of 0.8 on 10 pounds mean

Answer 9

A discount factor δ of 0.8 means that £10 worth of utility next period is equivalent to £8 today

£10 next period is equivalent to 𝛿£10 (=£8) today

The smaller the discount factor. The more impatient

Question 10

how do u rearrange the equation to show a discount factor is equal to a discount rate

Answer 10

Question 11

what would the discount rate and discount factor of someone very patient be

Answer 11

discount rate = 0

discount factor = 1

Question 12

what how is a discount factor of 0.8 the equivalent as a discount rate 0.25

Answer 12

A discount factor δ of 0.80 is equivalent to a discount rate ρ of 0.25

I.e. instead of £8 today you want £8*1.25=£10 in the future

The higher the discount rate the more impatient (has to be compensated a lot in the future to wait)

Question 13

what are they key assumptions of discount utility model

Answer 13

Utility independence - pattern of utilities does not matter
The sum of the discounted utilities matter

Consumption independence - consumption in one period does not affect utility in other periods (independence axiom)
..”one’s preference between an Italian and Thai restaurant tonight should not depend on whether one had Italian last night nor whether one expects to have it tomorrow”

Stationary instantaneous utility - preferences don’t change over time

Independence of discounting from consumption
all forms of consumption, costs and benefits, discounted at same rate. Otherwise, no uniform time preference (banana time preference, vacation time preference)

Question 14

what does consistent time preferences require

Answer 14

Stationary discounting - people use same discount rate over lifetime (i.e. it doesn’t vary with age)
Constant discounting - same discount rate for all future periods

Question 15

3 experimental methods on how elicit discount rates

Answer 15

choice tasks
matching tasks
pricing tasks

Question 16

what’s the methodology for choice tasks. and what’s the problem

Answer 16

Do you prefer £100 now to £110 in one year? If yes. Discount rate is at least ?%

Series of questions to establish exact discount rate (i.e. Indifferent between sum today and another sum one year from now)

Problem; anchoring effect
The subjects’ answers may be influenced by the first question

Question 17

explain the methodology of matching tasks. what’s the problems

Answer 17

How much money would you require in one year to be indifferent between that sum an £100 now?
OR
How much money would you require now to be indifferent between that sum and £100 one year from now now?

provides us with exact discount rate

no anchoring problem

problems; inconsistencies
- Higher discount rates (more impatient)
When asked to state the future amount that would be equivalent to a specified amount today
-Lower discount rate
when asked to state the amount today that is equivalent to a specified future amount

Question 18

explain the pricing tasks methodology

Answer 18

Eliciting a willingness-to-pay in order to receive or avoid a particular outcome in the future

Monetary or non-monetary outcomes

Question 19

what’s the wealth effect

Answer 19

The wealth effect examines how a change in personal wealth influences consumer spending and economic growth. Rising wealth has a positive impact on consumer spending.

Question 20

why use front end delay (paying someone in one month and 7 months)

Answer 20

so transaction costs are constant. setting up bank accounts etc.

Question 21

what’s the issue with time inconsistent preferences

Answer 21

smaller sooner vs larger later

temptation, procrastination

example:
Prefer a prize of $100 immediately to $200 in two years
do not Prefer a prize of $100 in 6 years to $200 in eight years

Question 22

what’s present bias

Answer 22

People tend to be more impatient in the short run (higher discount rate) and become more patient over longer periods of time i.e. a declining discount rate - passion for the present

Sharp discounting of near future relative to the present

But not much discounting of very distant future relative to not quite so distant future

Question 23

what’s the three different discount functions

Answer 23

DUM. Exponential
Quasi-hyperbolic
Hyperbolic

Question 24

describe the discounted utility model

Answer 24

Question 25

describe the hyperbolic discounting model

Answer 25

Question 26

describe the quasi hyperbolic discounting model

Answer 26

Question 27

what are naive consumers like

Answer 27

Naïve agents assume future preferences identical to current ones, overestimating their β;

Think they will prefer LL to SS in future

Think they will use a constant discount rate in future but use a hyperbolic

Question 28

what are smart consumers like

Answer 28

Smart agents can predict accurately how their preferences will change over time (e.g. learning) (β = b)

Question 29

what’s the sign effect

Answer 29

People use much lower discount rates for losses than when gains are involved

a gain in future is discounted heavily. It is not worth that much.

A loss in future is not discounted heavily -> you don’t get less loss by waiting

Many prefer an immediate loss rather than to delay it (zero discount rate)

Question 30

what’s the The ‘delay-speedup’ asymmetry

Answer 30

people prepared to pay less to speed-up delivery (gain) than need to be compensated for delay (loss)

Losses loom larger than gains

Question 31

what’s the preference for improving sequence

Answer 31

DUM; people will prefer a declining sequence to an increasing sequence since later outcomes are discounted more heavily

However; people like rising income and consumption profiles
Eg. wages

Question 32

sheet in class for time inconsistencies

Answer 32

on phone - 10-2-22

Question 33

explain the Harrison et al. 2002. Estimating Individual Discount Rates in Denmark: A Field Experiment paper.

Answer 33

Choice tasks - Twenty different amounts were offered as alternatives to the fixed option - Random payment used as incentive - Use of ‘front-end delay’

Use of different time horizons

hypothesis 1 - The discount rates for given time horizons do not differ across households
2 - The discount rate for given households do not differ across time horizon

Hypothesis 1; rejected
Variation in discount rates across socio-demographic characteristics (income, age etc.)
Hypothesis 2; confirmed
Constant discount rates (beyond one year) for given households