Intertemporal Choice

Question 1

Pollack (1970), Constantinides (1990)

Answer 1

Habit formation models: reference dependence without Loss Aversion or diminishing sensitivity

Question 2

Becker & Murphy (1988)

Answer 2

Long and short run effect differ greatly; negative price effects between future and today

Question 3

Ashraf, Karlan & Yin (2006)

Answer 3

Sophisticates should engage in commitment programmes, particularly to gain long run benefits Banking services in the Philippines

81% increase in savings, 28.4% take up SEED, Marketing ineffective

Question 4

Abel (1990)

Answer 4

Nested utility function - capturing 1. Time Separability, 2. Habit Formation 3. Relative Incomes

Question 5

Loewenstein, O’Donoghue & Rabin (2003)

Answer 5

Present bias: under saving today, consume more today and less in the future

Question 6

Loewenstein (1988)

Answer 6

Delay-speedup asymmetry: k period delay needs 2-4x compensation for equivalent expedition of an event

Loss aversion reinforces time discounts, increases the power aversion to delay and decreases the attractiveness of speedups

Question 7

Kaur, Kremer & Mullainathain (2015)

Answer 7

Workers are present biased - output increases as randomly assigned payday looms closer

Workers also self select into weakly dominated employment contracts; lower pay under low output realisation but same pay under high outcome as they value sharper incentives for motivation

Question 8

Frederick, Loewenstein & O’Donoghue (2002)

Answer 8

Discount rates are not constant over time, DU model questioned Discount Factors Increase over time, discount rates fall over time… but less evidence for this when excluding time horizons longer than 1 year - “short termism” Sign Effect - gains discounted more than losses Magnitude Effect - small amounts discounted more Prefer improving sequences than declining, sequences discounted differently to singularly

Question 9

Gul & Pesendorfer (2001)

Answer 9

Individuals often best without a tempting option in their choice set, preference for commitment … might pay to remove tempting options

Question 10

Royer, Stehr & Sydnor (2015)

Answer 10

Commitment programs bring LR benefits, gym attendance doubles with both an incentive of $10 per visist (3 max per week) but commitment program of 2 month membership prolongs benefits

Control - 20% attendance

Incentives - 25% in Month 2, back to 20% by Month 3

Incentives + Commitment - 30% still by month 6….12% above Incentives

Behaviour sustianed even after the initial commitment device issues and expired

Question 11

O’Donoghue & Rabin (1999)

Answer 11

TC - DUM, Exponential Discounts and correct future beliefs, time consistent preferences Naif - Choose based on today’s preferences, but incorrect beliefs Sophisticates - Time inconsistent preferences, but with correct beliefs about future behaviour Sophisticates vs. Naifs. vs. TCs - sophistication mitigates procrastination but exacerbates preproperation. Naifs most harmed by present bias

Question 12

Guiso, Sapienza and Zingales (2018)

Answer 12

GFC increased risk aversion, may explain the equity premium puzzle

Question 13

Caplin & Leahy (2001)

Answer 13

Anticipation incorporated into prospect theory: impact of price uncertainty massively under predicted in standard models

Anticipation utility can create a downward bias on discount factors

Question 14

Ariely & Loewenstein (2006)

Answer 14

Hot and cold states; impulse purchases eg. arousal increases risky behaviour

Question 15

Farber (1953)

Answer 15

Students asked to rate 1-7 days of the week, Friday rated better than Sunday despite having school…utility from anticipation of the weekend

Question 16

Saunders (1993)

Answer 16

Weather impacts the stock market via trader moods

Question 17

Hirshleifer & Shumway (2003)

Answer 17

Cloud and sun impact stock market performance, 26 countries from 1982-1997… rain and snow uncorrelated

Question 18

Cartwright (2014)

Answer 18

“Beta - delta” model discussed, hyperbolic discount factor rising over time vs. constant under exponential discounting More impatient in the short run, procrastination

Question 19

Reversed:

Habit formation models: reference dependence without Loss Aversion or diminishing sensitivity

Answer 19

Pollack (1970), Constantinides (1990)

Question 20

Reversed:

Long and short run effect differ greatly; negative price effects between future and today

Answer 20

Becker & Murphy (1988)

Question 21

Reversed:

Sophisticates should engage in commitment programmes, particularly to gain long run benefits Banking services in the Philippines

81% increase in savings, 28.4% take up SEED, Marketing ineffective

Answer 21

Ashraf, Karlan & Yin (2006)

Question 22

Reversed:

Nested utility function - capturing 1. Time Separability, 2. Habit Formation 3. Relative Incomes

Answer 22

Abel (1990)

Question 23

Reversed:

Present bias: under saving today, consume more today and less in the future

Answer 23

Loewenstein, O’Donoghue & Rabin (2003)

Question 24

Reversed:

Delay-speedup asymmetry: k period delay needs 2-4x compensation for equivalent expedition of an event

Loss aversion reinforces time discounts, increases the power aversion to delay and decreases the attractiveness of speedups

Answer 24

Loewenstein (1988)

Question 25

Reversed:

Workers are present biased - output increases as randomly assigned payday looms closer

Workers also self select into weakly dominated employment contracts; lower pay under low output realisation but same pay under high outcome as they value sharper incentives for motivation

Answer 25

Kaur, Kremer & Mullainathain (2015)

Question 26

Reversed:

Discount rates are not constant over time, DU model questioned Discount Factors Increase over time, discount rates fall over time… but less evidence for this when excluding time horizons longer than 1 year - “short termism” Sign Effect - gains discounted more than losses Magnitude Effect - small amounts discounted more Prefer improving sequences than declining, sequences discounted differently to singularly

Answer 26

Frederick, Loewenstein & O’Donoghue (2002)

Question 27

Reversed:

Individuals often best without a tempting option in their choice set, preference for commitment … might pay to remove tempting options

Answer 27

Gul & Pesendorfer (2001)

Question 28

Reversed:

Commitment programs bring LR benefits, gym attendance doubles with both an incentive of $10 per visist (3 max per week) but commitment program of 2 month membership prolongs benefits

Control - 20% attendance

Incentives - 25% in Month 2, back to 20% by Month 3

Incentives + Commitment - 30% still by month 6….12% above Incentives

Behaviour sustianed even after the initial commitment device issues and expired

Answer 28

Royer, Stehr & Sydnor (2015)

Question 29

Reversed:

TC - DUM, Exponential Discounts and correct future beliefs, time consistent preferences Naif - Choose based on today’s preferences, but incorrect beliefs Sophisticates - Time inconsistent preferences, but with correct beliefs about future behaviour Sophisticates vs. Naifs. vs. TCs - sophistication mitigates procrastination but exacerbates preproperation. Naifs most harmed by present bias

Answer 29

O’Donoghue & Rabin (1999)

Question 30

Reversed:

GFC increased risk aversion, may explain the equity premium puzzle

Answer 30

Guiso, Sapienza and Zingales (2018)

Question 31

Reversed:

Anticipation incorporated into prospect theory: impact of price uncertainty massively under predicted in standard models

Anticipation utility can create a downward bias on discount factors

Answer 31

Caplin & Leahy (2001)

Question 32

Reversed:

Hot and cold states; impulse purchases eg. arousal increases risky behaviour

Answer 32

Ariely & Loewenstein (2006)

Question 33

Reversed:

Students asked to rate 1-7 days of the week, Friday rated better than Sunday despite having school…utility from anticipation of the weekend

Answer 33

Farber (1953)

Question 34

Reversed:

Weather impacts the stock market via trader moods

Answer 34

Saunders (1993)

Question 35

Reversed:

Cloud and sun impact stock market performance, 26 countries from 1982-1997… rain and snow uncorrelated

Answer 35

Hirshleifer & Shumway (2003)

Question 36

Reversed:

“Beta - delta” model discussed, hyperbolic discount factor rising over time vs. constant under exponential discounting More impatient in the short run, procrastination

Answer 36

Cartwright (2014)