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Sign-dependence in intertemporal choice

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Abstract

Allowing for sign-dependence in discounting substantially improves the description of people’s time preferences. The deviations from constant discounting that we observed were more pronounced for losses than for gains. Our data also suggest that the discount function should be flexible enough to allow for increasing impatience. These findings challenge the current practice in modeling intertemporal choice where sign-dependence is largely ignored and only decreasing impatience is allowed. Overall, the sign-dependent model of Loewenstein and Prelec (1992) with the constant sensitivity discount function of Ebert and Prelec (2007) provided the best fit to our data.

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Notes

  1. Moreover, their econometric analysis did not allow for a complete comparison between the descriptive performance of Loewenstein and Prelec’s generalized hyperbolic discount function and that of other discount functions that have been proposed as alternatives to constant discounting.

  2. For an explanation of the advantages of this definition of loss aversion over other definitions see Köbberling and Wakker (2005). For experimental evidence in favor of this definition see Abdellaoui et al. (2007).

  3. Akaike’s information criterion (AIC) is defined as −2 logL + 2 k where k is the number of parameters to be estimated. A better fit (higher likelihood) thus corresponds with a smaller value of the AIC.

  4. Drazen Prelec (personal communication) has experienced similar problems in estimating α.

  5. Baltussen et al. (2012) showed that different responses may occur in more complex tasks than those of this paper.

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Acknowledgments

Thomas Epper, Peter P. Wakker, the editor W. Kip Viscusi, and an anonymous referee gave helpful comments. Arthur E. Attema and Corina Paraschiv helped to collect the data. Christina Stoddard suggested many linguistic improvements. Han Bleichrodt’s research was supported by a grant from the Netherlands Organization for Scientific Research (NWO).

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Authors and Affiliations

  1. Greg-HEC, CNRS & HEC Paris, Paris, France

    Mohammed Abdellaoui

  2. Erasmus School of Economics, Rotterdam, The Netherlands

    Han Bleichrodt

  3. University Rennes 1, Greg-HEC, & IUF, Rennes, France

    Olivier l’Haridon

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  1. Mohammed Abdellaoui
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Correspondence to Han Bleichrodt.

Appendix. Comparison of goodness of fit of the different discount functions

Appendix. Comparison of goodness of fit of the different discount functions

The following three tables show the values of the test statistics of the likelihood ratio tests (in light grey) and the Vuong tests for comparing the goodness of fit of the various discount functions. A positive value indicates that the model mentioned in the column fits better than the model mentioned in the row. A negative value means that the row model fits better than the column model. The p-values are stated in parentheses.

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Abdellaoui, M., Bleichrodt, H. & l’Haridon, O. Sign-dependence in intertemporal choice. J Risk Uncertain 47, 225–253 (2013). https://doi.org/10.1007/s11166-013-9181-9

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