Anomalies in Intertemporal Choice

Anomalies in Intertemporal Choice - Andrew Rapaport 1/20/09...

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Andrew Rapaport 1/20/09 Econ 505 Anomalies in Intertemporal Choice Since 1937 when it was introduced, the discounted utility model has been at the forefront of economic analyses of intertemporal choice. To be put very simply the DU is a method to calculate consumption levels of consumers. Even though it is very widely used, the DU model has not been researched very much in contrast to the expected utility model for choice under uncertainty. There are four anomalies associated with the DU. First is the Common Difference Effect. This anomaly states that an individual is indifferent between adding a given amount of units at any given time. As an example a person may prefer one apple today and two apples tomorrow, but at the same time prefer two apples in 51 days to one apple in 50 days. The second anomaly is the Absolute Magnitude Effect. A study found that large dollar amounts suffer less proportional discounting than smaller dollar amounts. The third anomaly is the Gain-Loss Asymmetry. It was found that losses are discounted at a lower rate than gains are. Lowenstein found that subjects were in average indifferent between
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This note was uploaded on 06/09/2009 for the course ECON 505 taught by Professor Brad during the Spring '09 term at Ohio State.

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Anomalies in Intertemporal Choice - Andrew Rapaport 1/20/09...

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