Non-Linear Time Perception and Time Inconsistency

Abstract

'When a man sits with a pretty girl for an hour, it seems like a minute. But let him sit on a hot stove for a minute and it's longer than any hour. That's relativity.' Albert Einstein.

This brief paper proposes a framework that interprets time inconsistent behavior being caused by nonlinear time perception of individuals. I assume that individuals have their own internal clock, on which they make consistent intertemporal choices. If the conversion from the physical time into the psychological time is not linear, it naturally causes time inconsistent behavior. Indeed, any time inconsistent behavior can be solely attributed to the nonlinear transformation of time.

In the prospect theory, the irregular risk taking behavior is attributed to the inverse S-shaped probability weighting function. Similarly, the inverse S-shaped time perception function is consistent with the present bias (hyperbolic discounting) and the future bias. I estimate such a time perception function from the data of my recent experiment.

Keywords: Intertemporal Choice, Time Preference, Hyperbolic Discounting, Time Perception

JEL Classification: C91, D81, D99