Lecture 5 Time Preferences Flashcards Preview

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Flashcards in Lecture 5 Time Preferences Deck (11)
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1
Q

Intertemporal Choice

A

Decisions in which the timing of costs and benefits are spread out over time

2
Q

dicounted utility

A

In choices that involve a tradeoff between current and future outcomes people discount the future to some extent. People are impatient and earlier outcomes add more to their utility than later outcomes

3
Q

What are the three time preferences of the Homo Economicus

A
  • Constant impatience over time
  • No systematic time-inconsistence
  • Exponentially discounts the future
4
Q

Why is the Exponential Discounting not a realistic model?

A

decreasing impatience -People are generally more willing to wait in the future than in the present

Self-control problems - People make plans for the future, but often do not behave accordingly

5
Q

Which two selves do we have?

A

The should self
The want self

6
Q

What are characteristics of the should self?

A

Planner: long-run optimizing
reasoning, system 2
comparison of options

7
Q

What are characteristics of the want self?

A

doer: short-run gratification
emotions, system 1
one-at-a-time evaluation

8
Q

present bias or immediacy effect

A

tendency to prefer a smaller instant reward over a larger later reward, and to reverse this preference when both rewards are equally delayed

9
Q

What are five ways to precommit yourself because of the dynamically inconsistent preferences and the meaning?

A
  1. Cutting- off options -Making some options not possible anymore | Extreme
  2. Hurdles - A problem you have to solve first before being able to progress
  3. Bright-line rules - I no longer eat chocolate. Easy concrete rules
  4. Delays - You have to wait, maybe after the time
  5. Prearranged deals - Ok I will do this, but this in return
10
Q

What are two theories of Risky Choice?

A

Expected Utility Theory - Evaluation of final wealth states; stable risk preferences
Prospect Theorie - Evaluation of gains and losses; risk preferences depend on the reference point

11
Q

If people do not update their reference points, prospect theory lead to the two following predictions:

A

Break-Even effect: after losses, people tend to make more risk to achieve their reference point
House-Money Effect: after large gains, people are willing to take more risk, because losing “house money” does not hurt as much as losing “own money”