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A Theory of Reference Time

Ali al-Nowaihi (aa10@le.ac.uk) and Sanjit Dhami

No 13/26, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We consider a discounted utility model that has two components. (1) The instan- taneous utility is of the prospect theory form, thus, allowing for reference dependent outcomes. (2) The discount function embodies a ‘reference time’ to which all future outcomes are discounted back to, hence, the name, reference time theory. We allow the discount function to exhibit declining impatience, as in hyperbolic discounting models, subadditivity or both. We show that if the discount function is non-additive, then the presence of a reference time has important effects on intertemporal choices. For instance, this helps to explain apparently intransitive choices over time. We also show how several recent approaches to time discounting can be incorporated within our proposed framework; these include attribute models and models of uncertainty.

Keywords: Discounted utility models; Reference time theory; Prospect theory; Hyperbolic discounting, Subadditive discounting. (search for similar items in EconPapers)
JEL-codes: C60 D91 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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