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Published in: Optimization and Engineering 3/2020

09-05-2020 | Research Article

A solution method for heterogeneity involving present bias

Authors: Ling Peng, Peter E. Kloeden

Published in: Optimization and Engineering | Issue 3/2020

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Abstract

When solving for optimal strategies, a financial engineer needs to take into consideration of preferences heterogeneities, which involve not only present bias, but also future-focused preferences. We provide a reusable tool (i.e. algorithm) for explicitly solving optimal strategy in the presence of preferences variation over time, decision-makers and goods. In this framework, a new discount function identifies many hitherto unknown preference heterogeneities, a non-standard HJB yields sophisticated solution, a behavior equation produces naive and precommitted solutions. An application of the framework shows that a decision-maker can be neither impatient nor patient, and that sophisticated paradigm engenders immediate gratification in earlier phases of life cycle and self-control in later phases of life cycle.

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Appendix
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Metadata
Title
A solution method for heterogeneity involving present bias
Authors
Ling Peng
Peter E. Kloeden
Publication date
09-05-2020
Publisher
Springer US
Published in
Optimization and Engineering / Issue 3/2020
Print ISSN: 1389-4420
Electronic ISSN: 1573-2924
DOI
https://doi.org/10.1007/s11081-020-09505-y

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