Understanding Time-Inconsistent Heterogeneous Preferences in Economics and Finance: A Practice Theory Approach

Posted: 17 Apr 2018

See all articles by Panagiotis Andrikopoulos

Panagiotis Andrikopoulos

Centre for Financial and Corporate Integrity (CFCI), Coventry University

Nick Webber

University of Warwick - Warwick Business School

Date Written: March 31, 2018

Abstract

This paper introduces an innovative framework for decision making by individuals with inconsistent preferences. Practices, associations of individuals with a preference set shared by its members, provide context and unify preferences across an economy so that decision-makers are situated in social and economic structures. Our framework models the time evolution of certain attributes, emerging from the practice framework, that govern individuals’ decisions and their intertemporal variation. A novel feature is that preferences are able to rank other preference sets without the need to aggregate them. Instead, the selection of a preference set is treated as a decision in its own right. Our framework explains decision making paradoxes such as the disposition effect and agency cost considerations that are frequently encountered in the behavioural finance and economics literature.

Keywords: Intertemporal Choice, Time-Inconsistent Preferences, Multiple Selves, Disposition Effect, Decision Theory

JEL Classification: D81, D91, G40

Suggested Citation

Andrikopoulos, Panagiotis and Webber, Nick, Understanding Time-Inconsistent Heterogeneous Preferences in Economics and Finance: A Practice Theory Approach (March 31, 2018). Annals of Operation Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3153923

Panagiotis Andrikopoulos (Contact Author)

Centre for Financial and Corporate Integrity (CFCI), Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom
+44(0)247 765 7920 (Phone)

Nick Webber

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
+(44) 24 7652 4664 (Phone)

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