This paper discusses the discounted utility (DU) model: its historical development, underlying assumptions, and "anomalies" - the empirical regularities that are inconsistent with its theoretical predictions. We then summarize the alternate theoretical formulations that have been advanced to address these anomalies. We also review three decades of empirical research on intertemporal choice, and discuss reasons for the spectacular variation in implicit discount rates across studies. Throughout the paper, we stress the importance of distinguishing time preference, per se, from many other considerations that also influence intertemporal choices.

/pdf/time-discounting-and-time-preference-a-critical-review-47don96ek5.pdf

Time Discounting and Time Preference: A Critical Review

During recent years social scientists have come to reaffirm that understanding almost any facet of social life requires a simultaneous understanding of how economic institutions work and how they are influenced by values and norms. Sociology, and especially economic sociology, is well equipped to be of assistance in this endeavor. Neil Smelser and Richard Swedberg bring together leading sociologists, economists, and political scientists in The Handbook of Economic Sociology, the first comprehensive view of this vital and growing field. "This excellent volume is a compilation of some of the best writing in this field over the past decade, including basic works like Oliver Williamson's transaction cost theory of the firm, and [is] a helpful comparison of economic sociology to mainstream economics." —Francis Fukuyama, Foreign Affairs "This is the first comprehensive theoretical and empirical account of the burgeoning field of economic sociology. The scholarship is consistently strong. . .. The book will be greeted warmly and read by serious scholars throughout the social sciences." —Robert K. Merton "This is a bold, ambitious, almost daunting project. ... It will surely become the standard reference book for the field—the sort of text every scholar will have to know-, consult, and cite." —Viviana Zelizer

Handbook of Economic Sociology

Research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility (EU) anomalies—behaviors that violate the expected utility axioms. The relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility (DU) anomalies. We enumerate a set of DU anomalies analogous to the EU anomalies and propose a model that accounts for the anomalies, as well as other intertemporal choice phenomena incompatible with DU. We discuss implications for savings behavior, estimation of discount rates, and choice framing effects.

Anomalies in Intertemporal Choice: Evidence and an Interpretation

Temporal construal theory states that distant future situations are construed on a higher level (i.e., using more abstract and central features) than near future situations. Accordingly, the theory suggests that the value associated with the high-level construal is enhanced over delay and that the value associated with the low-level construal is discounted over delay. In goal-directed activities, desirability of the activity's end state represents a high-level construal, whereas the feasibility of attaining this end state represents a low-level construal. Study 1 found that distant future activities were construed on a higher level than near future activities. Studies 2 and 3 showed that decisions regarding distant future activities, compared with decisions regarding near future activities, were more influenced by the desirability of the end state and less influenced by the feasibility of attaining the end state. Study 4 presented students with a real-life choice of academic assignments varying in difficulty (feasibility) and interest (desirability). In choosing a distant future assignment, students placed relatively more weight on the assignment's interest, whereas in choosing a near future assignment, they placed relatively more weight on difficulty. Study 5 found that distant future plans, compared with near future plans, were related to desirability of activities rather than to time constraints. In everyday life, people judge and make decisions about events that will take place either in the relatively near future or in the distant future. For example, one may need to decide whether to take a vacation, give a lecture, or attend a conference a few months in advance or just a few days in advance. This article addresses the question of how temporal distance from an event affects people's decisions regarding that event. We argue that distant future events are construed on a higher level (i.e., by using more central and abstract features of the event) than near future events. Therefore, decisions regarding distant future events are likely to be based on relatively central and

The role of feasibility and desirability considerations in near and distant future decisions: A test of temporal construal theory.

Fifty-six heroin addicts and 60 age-matched controls were offered choices between monetary rewards ($11-$80) available immediately and larger rewards ($25-$85) available after delays ranging from 1 week to 6 months. Participants had a 1-in-6 chance of winning a reward that they chose on one randomly selected trial. Delay-discounting rates were estimated from the pattern of participants' choices. The discounting model of impulsiveness (Ainslie, 1975) implies that delay-discounting rates are positively correlated with impulsiveness. On average, heroin addicts' discount rates were twice those of controls (p = .004), and discount rates were positively correlated with impulsivity as measured by self-report questionnaires (p < .05). The results lend external validity to the delay-discounting rate as a measure of impulsiveness, a characteristic associated with substance abuse.

Heroin addicts have higher discount rates for delayed rewards than non-drug-using controls.

Two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 × 4 × 4 factorial design: scenario (postponing a receipt, postponing a payment, expediting a receipt, expediting a payment), time delay (0.5, 1, 2, and 4 years), and size of cashflow ($40, $200, $1000, and $5000). Individual discount rates were inferred from the responses, and then used to test competitively four hypotheses regarding the behavior of discount rates. The classical hypothesis asserting that the discount rate is uniform across scenarios, time delays, and sums of cashflow was flatly rejected. A market segmentation approach was found lacking. The results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value, and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position.

Discount rates inferred from decisions: an experimental study

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Discount rates inferred from decisions: an experimental study