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Understanding time-inconsistent heterogeneous preferences in economics and finance: a practice theory approach

Panagiotis Andrikopoulos () and Nick Webber ()
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Nick Webber: University of Birmingham

Annals of Operations Research, 2019, vol. 282, issue 1, 3-26

Abstract: Abstract This paper introduces an innovative framework for decision making by individuals with inconsistent preferences. Practices, associations of individuals with a preference set shared by its members, provide context and unify preferences across an economy so that decision-makers are situated in social and economic structures. Our framework models the time evolution of certain attributes, emerging from the practice framework, that govern individuals’ decisions and their intertemporal variation. A novel feature is that preferences are able to rank other preference sets without the need to aggregate them. Instead, the selection of a preference set is treated as a decision in its own right. Our framework explains decision making paradoxes such as the disposition effect and agency cost considerations that are frequently encountered in the behavioural finance and economics literature.

Keywords: Intertemporal choice; Time-inconsistent preferences; Multiple selves; Disposition effect; Decision theory (search for similar items in EconPapers)
JEL-codes: D81 D91 G40 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10479-018-2836-9

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