The discounted utility model and social preferences:: Some alternative formulations to conventional discounting
TL;DR: In this article, the authors consider four patterns of intertemporal choice: time effect, an inverse relation between time preference (TP) and the time implied in the choice, magnitude effect, a change in the preferences in function of the framing of the choices, and domain effect where TPs differ as between health and money.
About: This article is published in Journal of Economic Psychology.The article was published on 2002-06-01. It has received 16 citations till now. The article focuses on the topics: Intertemporal choice & Hyperbolic discounting.
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TL;DR: In this article, two graduate students overtook Professor Paul Samuelson as he was walking and asked why a beggar always takes the fifty-cent option when offered the choice between fifty cents and a dollar.
Abstract: Of the many jokes economists tell about themselves, this is my favorite. Two graduate students overtook Professor Paul Samuelson as he walked. “There's a beggar at the corner,” they told him, “who, when offered the choice between fifty cents and a dollar, always takes the fifty cents.” Samuelson replied, “He's irrational or it's impossible.” When reassured that the beggar had his wits about him, Samuelson decided to see for himself. “In my left hand, I have fifty cents; in my right, one dollar; you may have whichever one you prefer,” Samuelson said to the beggar. “I'll take the fifty cents,” the man answered without hesitation. After giving him the two quarters, Samuelson asked, “Don't you understand that a dollar is worth twice as much as fifty cents?” “Of course I do.” “Then why did you take the fifty cents?” “Had I taken the dollar,” the beggar replied, “economists wouldn't troop down here every day to offer me the choice.” Welfare economics rests on “one fundamental ethical postulate,” namely, that the preferences of individuals are to count in the allocation of resources. This approach to social policy assumes that, for any social decision, preferences are already given and “that the role of the social decision process is just to follow them.” In this framework, “preferences are treated as data of the most fundamental kind. Value, in the economic sense, is ultimately derived from individual preferences.”
106 citations
TL;DR: It is argued that the relationship between the discount of monetary and health consequences has to be determined in an indirect manner, by reference to the relationship maintained by the individual time preference rates for health and money in the context of private and social choice.
Abstract: Despite the theoretical arguments presented in the literature regarding discounting over the last 25 years, no satisfactory reply has yet been offered to the question of whether health consequences have to be discounted at the same rate as monetary consequences in the economic evaluation of health programmes or interventions designed to improve health. Against this background, the main objective of this paper was to review and systemise these theoretical arguments, with the aim of determining whether any of the positions identified can be accepted without reservation. Having determined that this is not possible, we investigated the rationality of discounting in the literature and, on this basis, propose a potential way to resolve the problem. Thus, we argue that the relationship between the discount of monetary and health consequences has to be determined in an indirect manner, by reference to the relationship maintained by the individual time preference rates for health and money in the context of private and social choice. Although this proposal moves the debate into the empirical field, its advantages must be weighed against the difficulties associated with the estimation of the time preferences.
50 citations
Cites background or result from "The discounted utility model and so..."
...Time preference rates are sensitive to the amounts, time horizons, sign and frame[65] involved in choices....
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...In two of these, time preferences rates for lives saved were compared with those for social money.[64,65] Two similar analyses have compared time preference rates for states of health with those for privatemoney....
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TL;DR: Manipulating the discounted utility of options resulted in different time management decisions, and reactions to time management situations were judged as less likely if the reactions had lower discounted utilities.
Abstract: The lens of behavioral decision theory offers a new perspective for research on time management. The basic idea of this approach is that people discount future consequences of their time management decisions, meaning that they work on tasks with smaller but sooner outcomes rather than on tasks with larger but later outcomes. The authors performed 2 experimental studies to test whether people are sensitive to differences in the discounted utility of time management decisions. In Experiment 1, they used vignettes of typical time management situations; Experiment 2 was a laboratory simulation (an in-basket task that was part of a training assessment). Participants in both studies were German students. As expected, manipulating the discounted utility of options resulted in different time management decisions. In Experiment 1, reactions to time management situations were judged as less likely if the reactions had lower discounted utilities. In Experiment 2, people spent less time on an interruption.
38 citations
TL;DR: In this article, the authors explore the opportunity to analyze capital budgeting decisions within a more realistic context and summarize alternative perspectives addressing these specific dimensions: the cognitive, the organizational, and the institutional.
Abstract: The accepted approach to capital budgeting leaves decision makers without appropriate guidance because it ignores the cognitive, organizational, and institutional dimensions of their decision-making process. This approach is based upon the unrealistic assumptions of neoclassical finance, where investors are assumed to be (or behave as if they were) fully rational and informed. This chapter explores the opportunity to analyze capital budgeting decisions within a more realistic context. To reach such an objective, it summarizes alternative perspectives addressing these specific dimensions: the cognitive, the organizational, and the institutional. All together, such dimensions suggest generalizing the current approach based on discounted cash flow analysis to provide decision makers with alternative ways to assess investment opportunities under more realistic approaches driven by behavioral and institutional finance.
14 citations
TL;DR: In this paper, the determinants of market participation and marketing channel choice in agricultural development are examined. But, the authors do not consider the impact of marketing channel selection on agricultural development.
Abstract: A fundamental concern of agricultural development is the efficient marketing of goods and services. This paper examines the determinants of market participation and marketing channel choice decisio...
14 citations
Cites background from "The discounted utility model and so..."
...0 0 if D∗i ≤ 0 { (4) The probability that a household will effectively participate in sorghum marketing is given based on the utility intuition (Lazaro et al., 2002)....
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...The probability that a household will effectively participate in sorghum marketing is given based on the utility intuition (Lazaro et al., 2002)....
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References
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TL;DR: The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways.
Abstract: The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways. Reversals of preference are demonstrated in choices regarding monetary outcomes, both hypothetical and real, and in questions pertaining to the loss of human lives. The effects of frames on preferences are compared to the effects of perspectives on perceptual appearance. The dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.
15,513 citations
TL;DR: In this paper, the authors enumerate a set of discounted utility 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.
Abstract: 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.
2,208 citations
"The discounted utility model and so..." refers background in this paper
...Such an incompatibility between normative hypotheses and observed behaviour is described in the economic literature as an anomaly (Loewenstein & Prelec, 1992)....
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TL;DR: In this paper, individual discount rates for losses and gains were estimated from survey evidence and they were found to vary inversely with the size of the reward and the length of time to be waited.
2,141 citations
1,938 citations
"The discounted utility model and so..." refers background or methods in this paper
...The Samuelson (1937) discounted utility (DU) model, together with its axiomatic derivations, defines individual behaviour with respect to time in normative terms....
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...According to the DU model of Samuelson (1937), the form of the function that individuals try to maximise must be inferred from the observed behaviour of those individuals, in such a way that 318 A. Lazaro et al. / Journal of Economic Psychology 23 (2002) 317–337...
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TL;DR: In this article, the authors highlight the question whether second-best saving is greater or smaller than first-best savings when given future saving is non-optimal from the standpoint of the present generation.
Abstract: This chapter highlights the question whether second-best saving is greater or smaller than first-best saving when given future saving is non-optimal from the standpoint of the present generation. The chapter presents the postulation that all generations expect each succeeding generation to choose the saving ratio that is second-best in its eyes. This somewhat game-theoretic model leads to the concept of an equilibrium sequence of saving-income ratios having the property that no generation acting alone can do better and all generations act so as to warrant the expectations of the future saving ratios. The chapter presents a comparison of this equilibrium and the first-best optimum. The concept and calculation of the second-best optimum is of interest even if that analysis does not explain actual national saving because society as a whole has no notion of such an optimum.
1,367 citations