Behavioural W7 Flashcards
Why are economists interested in understanding intertemporal choice?
Provide a real-world example of an inter-temporal choice you have faced.
Intertemporal choice refers to decisions that involve trade-offs between costs and benefits occurring at different points in time.
Economists are interested in it as it helps to study time preferences and consumer behaviour.
Eg: spend $100 now on some clothes or invest it into retirement funds.
Under normative intertemporal choice theory (Fisher 1930), what role does the interest rate play.
The interest rate serves as a crucial determinant of individuals’ intertemporal decisions, influencing their preferences for present versus future consumption, their decisions about saving and investment, and the equilibrium allocation of resources in capital markets.
Under normative intertemporal choice theory (Fisher 1930), what role does the discount
rate play.
It allows individuals to make rational decisions about how to allocate resources over time based on their preferences and the opportunity cost of delaying consumption or investment.
Under normative intertemporal choice theory (Fisher 1930), what is the optimisation
condition and how can we interpret it in words.
the extra consumption to be received later (1+r) offsets the extent to which later payoff is discounted (1+𝛿).
What is the interpretation of the personal interest rate and the personal discount rate.
Personal interest rate = represents the return individuals can earn on their investments or savings.
Personal discount rate = reflects the individual’s preferences for present versus future consumption.
Personal Interest rate formula.
r = (L/S)^1/t - 1
Personal discount rate formula.
= 1 - (S/L)^1/t
What are the pros and cons of matching tasks.
Matching = Participants “fill in the blank” to equate two intertemporal options (e.g., $100 now = in one year). Pros:
1. Reveals an indifference point so an exact discount rate can be imputed from a single response and
2. No anchoring problems.
Cons:
1. Responses are often very “coarse”.
2. Varied discount rates.
What are the pros and cons of single binary choice.
Single Binary Choice = once choice between a smaller sooner option or a larger later option.
Pros:
1.Simple and quick to categorise participants.
Cons:
1. Only reveals and upper or lower band on the discount rate.
What are the pros and cons of multiple choice tasks.
A series of SS-LL tasks.
Pros:
1. More info than a single choice.
2. Simple to answer and program.
Cons:
1. Anchoring effects = first choices influence other choices.
2. Doesn’t reveal a precise discount rate.
What are the pros and cons of iterating time preference tasks - staircase method.
Each question shown depends on the answer given to the preceding ones.
Pros:
1. Allows bigger range to be investigated.
2. Closer bounds on the indifference point.
Cons:
1. Difficult to implement.
What are the pros and cons of the convex time budget task.
Study individuals’ preferences for allocating time between different activities or tasks.
Pros:
1. Specific time preference is estimated for that individual.
Cons:
1. Complex to program and fill in.
What are pros and cons of self-reported measures of patience.
How willing are you to give up something that is beneficial for you today in order to benefit more from that in the future.
Pros:
1. Easy, quick and simple.
Cons:
1. Cannot be incentivised.
What are the pros and cons of delayed compensation method.
Cost of delay.
Pros:
1. Simple to implement.
Cons:
1. Cannot estimate the discount rate without additional information.
What is dynamic inconsistency.
People opt for LL in the first choice, but SS in the second choice.
