Know Thyself: Self Awareness and Utility Misprediction in Discounting Models of Intertemporal Choice

Luca Savorelli ()
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Luca Savorelli: Associazione Italiana per la Cultura della Cooperazione e del Non Profit, Postal: P.le della Vittoria, 15 - 47100 Forli',, Italy, http://www.aiccon.it/

No 57-2008, AICCON Working Papers from Associazione Italiana per la Cultura della Cooperazione e del Non Profit

Abstract: This review critically discusses the theoretical models of discounting through a selection of papers. It will focus on the comparison between the two major models, namely discounted utility and hyperbolic discounting. This paper differs from previous surveys in the attention given to the interpretation of models and suggestions for future research. First, it stresses how the economics literature is biased itself, since it considers only present-biased preferences on the basis of not well grounded evidence, while also future-biased preferences are worthwhile of attention to address relevant issues, like compulsive behaviors and work-life unbalance. Second, it makes qualifications on the meaning of self-awareness, distinguishing between cognitive boundaries and beliefs. Third, it suggests future direction of research to address this issue, fundamental for a sound policy analysis, by showing how the two main welfare criteria used in the literature to evaluate welfare of inconsistent individuals (long-run utility and Pareto criterion) have relevant shortcomings. Finally, it proposes a new perspective on misprediction of utility based on time perception

Keywords: future - biased preferences; intertemporal choice; partial naivete; self - control; sophistication; time inconsistency (search for similar items in EconPapers)
JEL-codes: A12 D11 D90 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008-12-18
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