Viewing the Future Through a Warped Lens: Why Uncertainty Generates Hyperbolic Discounting

Institute for Empirical Research in Economics University of Zurich Working Paper No. 510

46 Pages Posted: 3 Oct 2010

See all articles by Thomas Epper

Thomas Epper

CNRS - Lille Economics & Managment - UMR 9221; Catholic University of Lille - IESEG School of Management

Helga Fehr-Duda

ETH Zürich - Center for Economic Research

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: September 9, 2010

Abstract

A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people's proneness to probability distortions.

Keywords: Time Preferences, Risk Preferences, Hyperbolic Discounting, Probability Weighting, Institutionally Generated Uncertainty

JEL Classification: D01, D81, D91

Suggested Citation

Epper, Thomas and Fehr-Duda, Helga and Bruhin, Adrian, Viewing the Future Through a Warped Lens: Why Uncertainty Generates Hyperbolic Discounting (September 9, 2010). Institute for Empirical Research in Economics University of Zurich Working Paper No. 510, Available at SSRN: https://ssrn.com/abstract=1684027 or http://dx.doi.org/10.2139/ssrn.1684027

Thomas Epper (Contact Author)

CNRS - Lille Economics & Managment - UMR 9221 ( email )

Lille
France

Catholic University of Lille - IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

Helga Fehr-Duda

ETH Zürich - Center for Economic Research ( email )

Weinbergstr. 35
Zurich 8092
Switzerland

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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