Intertemporal choice as a tradeoff between cumulative payoff and average delay

Pavlo R. Blavatskyy ()
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Pavlo R. Blavatskyy: Montpellier Business School

Journal of Risk and Uncertainty, 2022, vol. 64, issue 1, No 4, 89-107

Abstract: Abstract Intertemporal choice involves outcomes that are received in different moments of time. This paper presents a new framework for analyzing intertemporal choice as a tradeoff between the cumulative payoff of a stream of intertemporal outcomes and its average delay (similar to the mean–variance approach in modelling risk preferences). Ceteris paribus, a decision maker prefers a stream of intertemporal payoffs with a higher cumulative payoff and a lower average delay. A decision maker with such time preferences always dislikes a partial delay in consumption (splitting one payoff into two, one of which is slightly delayed in time). In contrast, many existing models (e.g. discounted utility, quasi-hyperbolic discounting, generalized hyperbolic discounting or liminal discounting) imply a preference for partial delay. Our proposed model is compatible with the common difference effect (corresponding to a horizontal fanning-out of indifference curves) and the absolute magnitude effect (corresponding to a vertical fanning-in of indifference curves). The proposed model is applied to the standard consumption-savings problem with a constant interest rate. A simple experimental test of the proposed model vs. discounted utility and quasi-hyperbolic discounting is presented.

Keywords: Intertemporal choice; Time preference; Cumulative payoff; Average delay; Temporal tradeoff (search for similar items in EconPapers)
JEL-codes: D15 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11166-022-09370-3

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