Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility

This article provides a parameter-free measurement of utility in intertemporal choice and presents new and more robust evidence on the discounting of money outcomes. Intertemporal utility was concave for gains and convex for losses, consistent with a hypothesis put forward by Loewenstein and Prelec...

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Bibliographic Details
Published in:The Economic journal (London) 2010-06, Vol.120 (545), p.845-866
Main Authors: Abdellaoui, Mohammed, Attema, Arthur E., Bleichrodt, Han
Format: Article
Language:English
Subjects:
Discount rates
Discounting
Discounts
domain_shs.eco.eco
Economic models
Economic utility
Economics and Finance
Empirical evidence
Gains
Humanities and Social Sciences
Intertemporal utility
Losses
Management science
Mathematical economics
Microeconomics
Statistical median
Studies
Tradeoff analysis
Tradeoffs
Utility functions
Utility measurement
Utility models
Utility rates
Utility theory
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Summary:This article provides a parameter-free measurement of utility in intertemporal choice and presents new and more robust evidence on the discounting of money outcomes. Intertemporal utility was concave for gains and convex for losses, consistent with a hypothesis put forward by Loewenstein and Prelec (1992) . Discount rates declined over time but less so than previously observed under the assumption of linear utility. For approximately 40% of our subjects constant discounting provided the best fit. The remaining 60% were most consistent with Harvey's (1986) power discounting. Our data provide little support for the popular quasi-hyperbolic model, which is widely used in economics today. We observed an asymmetry in the discounting of gains and losses that, unlike earlier findings, cannot be explained by a framing effect.
ISSN:0013-0133
1468-0297
DOI:10.1111/j.1468-0297.2009.02308.x