A General Theory of Time Discounting: The Reference-Time Theory of Intertemporal Choice

62 Pages Posted: 4 Jul 2008

See all articles by Ali al-Nowaihi

Ali al-Nowaihi

University of Leicester - Department of Economics

Sanjit Dhami

University of Leicester

Date Written: July 2, 2008

Abstract

We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the generalized hyperbolic model (Loewenstein and Prelec 1992), the quasi-hyperbolic model (Phelps and Pollak 1968, Laibson 1997) and subadditivity of time discounting (Roelofsma and Read 2000, Read 2001 and Scholten and Read 2006a). These models are extended to allow for (i) reference points for time and wealth, and (ii) different discount functions for gains and losses. RT is able to account for all the 6 main anomalies of time discounting: gain-loss asymmetry, magnitude effect, common difference effect, delay-speedup asymmetry, apparent intransitivity of time preferences, and non-additivity of time discounting. We provide a class of utility functions compatible with RT. We show how RT can be extended to incorporate uncertainty and attribute models of intertemporal choice.

Keywords: Anomalies of the discounted utility model, Hyperbolic discounting, Prospect theory, SIE value functions

JEL Classification: C60, D91

Suggested Citation

al-Nowaihi, Ali and Dhami, Sanjit, A General Theory of Time Discounting: The Reference-Time Theory of Intertemporal Choice (July 2, 2008). Available at SSRN: https://ssrn.com/abstract=1154543 or http://dx.doi.org/10.2139/ssrn.1154543

Ali Al-Nowaihi

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Sanjit Dhami (Contact Author)

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

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