Behavioral eco lect 5: Intertemporal choice part 5
Variation
Which option do you prefer?
A: Italian restaurant today, Thai tomorrow
B: Italian restaurant today, Italian tomorrow
Which option do you prefer?
C: Thai restaurant today, Thai tomorrow
D: Thai restaurant today, Italian tomorrow
DU(D) = D(0)u(Th) + D(1)u(It)
DU(A) = D(0)u(It) + D(1)u(Th)
DU(B) = D(0)u(It) + D(1)u(It)
DU(C) = D(0)u(Th) + D(1)u(Th)
Spread
SLIDE 43/50
Can we predict future utilities
Underprediction of adaptation: we underestimate the extent to which we will adapt to new circumstances.
Diversification bias: we overestimate our future preference for variety over time (see Lecture 1)
In order to transform an outcome stream into a utility stream, we need to predict the utility we will derive in the future from obtaining an outcome in the future.
Projection bias: we tend to overestimate the extent to which our future selves will have the same preferences as our current selves. (see Lecture 1)
Overview
Exponential vs. hyperbolic discounting
Violations of discounted utility in general
Discounted utility
3 no-longer-puzzling phenomena
Setting the alarm
Smoking
Subscription to the gym
We are time-inconsistent: we make plans for the future that we fail to carry out
it can be caused by hyperbolic discounting
it can also be caused by failure to predict future utilities