Present Bias and Discount Rate Risk

Lars A. Lochstoer, Stig R. H. Lundeby and Zhaneta K. Tancheva

No 34453, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent evidence in the psychology literature suggests that individuals' degree of present bias varies with the state of nature and increases under stress. Consistent with this notion, we document, using survey data on individuals’ expected and realized consumption growth, that agents indeed tend to overconsume relative to their expectations and that the degree of such overconsumption is higher in bad times. We analyze the asset pricing implications of this bias and show that even if they control a small fraction of wealth, investors with time-varying degree of present bias cause substantial, priced discount rate risks that have first-order impact on the level and time-variation of asset risk premiums. The mechanism is distinct from that of models with time-varying preference parameters and that of models with biased expectations about aggregate outcomes.

JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-fmk and nep-upt
Note: AP
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