Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting

Thomas Epper, Helga Fehr-Duda and Adrian Bruhin ()

No 510, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people's proneness to probability distortions.

Keywords: Time Preferences; Risk Preferences; Hyperbolic Discounting; Probability Weighting; Institutionally Generated Uncertainty (search for similar items in EconPapers)
JEL-codes: D01 D81 D91 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:510

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