Intertemporal decision making has to take into account the unavoidable uncertainty surrounding the realization of gains and losses in the future. An intertemporal state-dependent expected utility model, deducing probability weighting by incorporating anticipated emotional reactions towards resolution of uncertainty, is sufficient to explain hyperbolic discounting. A .sign-effect. (losses are discounted less than gains), Loewenstein.s delay-speed up asymmetry and a magnitude effect for losses (larger outcomes are discounted less) appear under fairly general conditions. A perverse .magnitude effect develops, however, for gains (larger outcomes are discounted more). Within the domain of small gains a .magnitude effect can be rationalized by incorporating anticipated transaction costs. As a corollary, a subject will discount gains at higher and losses at lower rates, if it is poor.
9 Jan. 2008 → 10 Jan. 2008
Workshop on Rationality & Emotions. Jointly organised by CEPERC, University of Provence, France