Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting

Epper, Thomas; Fehr-Duda, Helga; Bruhin, Adrian

doi:10.1007/s11166-011-9129-x

Cited by 146 publications

(70 citation statements)

References 60 publications

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“…and w(. ), we use a simple and easy to understand procedure introduced in Fehr-Duda et al (2006) and successfully employed to estimate utility function and probability weighting function parameters in several subsequent studies (including: Bruhin et al 2010;Fehr-Duda et al 2010;and Epper et al 2011). Because it uses a choice list elicitation task which is very similar in structure to our incentivised confidence elicitation task, it is particularly well suited to our study as its use minimises the cognitive load involved in subjects learning how to respond to the two types of task.…”

Section: Methodsmentioning

confidence: 99%

“…Heteroskedasticity in the error variance across elicitation tables is accounted for, as in Epper et al (2011), by assuming the standard deviation of the distribution of the error term, v L , is proportional to the difference between the guaranteed amounts in Option B as one moves down the rows of the table. Hence, v L = v(x 1L − x 2L ), where v denotes an additional parameter to be estimated.…”

Section: Methodsmentioning

confidence: 99%

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How do risk attitudes affect measured confidence?

2016

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We examine the relationship between confidence in own absolute performance and risk attitudes using two confidence elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance. The former procedure reproduces the Bhardeasy effect^(underconfidence in easy tasks and overconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports. The latter procedure produces general underconfidence, which is significantly reduced, but not eliminated when we filter out the effects of risk attitudes. Finally, we find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting.

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Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

How do risk attitudes affect measured confidence?

2016

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“…The connection seems to arise because, in contrast to sure consequences in the near future, delayed consequences are perceived as inherently risky (Dasgupta and Maskin, 2005). As such, non-linear probability transformations like those which some writers such as Kahneman and Tversky (1979) and Tversky and Kahneman (1992) applied to explain Allais-like behavior can also adjust discount factors in order to help explain choice of timed outcomes (Epper et al, 2011;Baucells and Heukamp, 2012).…”

Section: Timing and Nonlinear Expectationsmentioning

confidence: 99%

Rationality and Dynamic Consistency Under Risk and Uncertainty

Hammond

Zank

2014

Handbook of the Economics of Risk and Uncertainty

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For choice with deterministic consequences, the standard rationality hypothesis is ordinality -i.e., maximization of a weak preference ordering. For choice under risk (resp. uncertainty), preferences are assumed to be represented by the objectively (resp. subjectively) expected value of a von NeumannMorgenstern utility function. For choice under risk, this implies a key independence axiom; under uncertainty, it implies some version of Savage's sure thing principle. This chapter investigates the extent to which ordinality, independence, and the sure thing principle can be derived from more fundamental axioms concerning behaviour in decision trees. Following Cubitt (1996), these principles include dynamic consistency, separability, and reduction of sequential choice, which can be derived in turn from one consequentialist hypothesis applied to continuation subtrees as well as entire decision trees. Examples of behavior violating these principles are also reviewed, as are possible explanations of why such violations are often observed in experiments.

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“…Remark 4 There exists an interesting discussion in the theoretical and experimental literature about whether hyperbolic time discounting is conceptually nothing else than rank dependent decision making under an uncertain stopping time as, e.g., represented by mortality risks (cf., e.g., Halevy (2008) and Epper et al (2011) as well as references therein). Although QHD life-cycle models can, by (18) and (21), be formally subsumed under our RDU life-cycle model, we do not claim that hyperbolic time discounting reduces in general to rank dependent decision making.…”

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confidence: 99%

The Impact of Biases in Survival Beliefs on Savings Behavior

2017

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How households consume and save over the life-cycle and how time preferences as well as the time horizon affect these decisions are classical economic questions. According to numerous studies on subjective survival beliefs, young people (younger than about 65) underestimate whereas old (older than about 70) people overestimate their survival chances on average. Another phenomenon is that, on average, young people undersave whereas old people oversave and hold on to their assets too long in life when compared to the optimal behavior under rational survival expectations. Hence, relative to this rational benchmark, the data on actual savings behavior are "puzzling".Intuitively, one would conjecture that the observed age-dependent biases between perceived and objective survival chances are an important explanation for these saving puzzles. The reason is that individuals who do not expect to live for long will consume in the present rather than save for the future to the effect that underestimation of survival chances at young age should give rise to undersaving early in life. Conversely, overestimation of survival chances at an old age should lead to oversaving later in life, so that individuals also hold on to their assets until too late in life.The main objective of our paper is to develop an economic theory based on a life-cycle model with biased survival beliefs to investigate whether this conjecture is correct. We show that biased beliefs may, but need not necessarily, resolve the saving puzzles. While overestimation of survival beliefs in old-age induces households to save more than they would under rational survival beliefs, this oversaving must be sufficiently pronounced so that also the old-age stock of asset holdings exceeds the respective asset holdings under rational expectations. At the same time, with forward looking behavior, this overestimation should not be too pronounced because otherwise the optimizing households would anticipate this overestimation at old-age and rather undersave at a young age.Electronic copy available at: https://ssrn.com/abstract=2943885 Abstract On average young people "undersave" whereas old people "oversave" with respect to the rational expectations model of life-cycle consumption and savings. According to numerous studies on subjective survival beliefs, young people also "underestimate" whereas old people "overestimate" their objective survival chances on average. We take a structural behavioral economics approach to jointly address both empirical phenomena by embedding subjective survival beliefs that are consistent with these biases into a rank-dependent utility (RDU) model over life-cycle consumption. The resulting consumption behavior is dynamically inconsistent. Considering both naive and sophisticated RDU agents we show that within this framework underestimation of young age and overestimation of old age survival probabilities may (but need not) give rise to the joint occurrence of undersaving and oversaving. In contrast to this RDU model, the familiar quasi-hyperbol...

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Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting

Cited by 146 publications

References 60 publications

How do risk attitudes affect measured confidence?

How do risk attitudes affect measured confidence?

Rationality and Dynamic Consistency Under Risk and Uncertainty

The Impact of Biases in Survival Beliefs on Savings Behavior

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