Friday, June 19, 2015

Loewenstein and Thaler (1989) on Intertemporal Choice

George Loewenstein and Richard H. Thaler, “Intertemporal Choice.” Journal of Economic Perspectives 3(4): 181-193, Autumn, 1989.

• In choices over time involving money, people should discount at the interest rate – or at least so says standard optimization. But people are inconsistent in their revealed discount rate choices. 

• The discount rates that people implicitly employ seem to depend upon the magnitude of the sums involved, whether a gain or a loss is being evaluated, the time delay, and other factors. Discount rates fall with the length of time delay and the size of the reward, and discount rates are higher for gains than for losses. 

• Discount rates that vary with the time delay imply the possibility for dynamic inconsistency. If discount rates decline over time delays, for instance, then people will overconsume in the present, relative to their prior plans. 

• Workers seem to have a taste for increasing wage profiles over time, and economists have a hard time talking them out of it even when the standard economics arguments point in the other direction. Loss aversion, or fears of future self-control lapses, probably are part of the explanation. 

• Savoring and dread also alter time preferences in ways that do not conform neatly to the standard model.

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