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1 – 10 of 121Isabel González Fernández and Salvador Cruz Rambaud
The purpose of this paper is to introduce the main measures of inconsistency in the context of intertemporal choice and to identify the relationships between them (more…
Abstract
Purpose
The purpose of this paper is to introduce the main measures of inconsistency in the context of intertemporal choice and to identify the relationships between them (more specifically, the measures by Prelec, Takahashi and Rohde). In effect, Thaler (1981), awarded the Nobel Prize in Economics 2017, argued that when a preference must be expressed between two reward options, some people may reverse their original preference when a significant delay is introduced before the reward is to be received. This anomaly is known as inconsistency in intertemporal choice.
Design/methodology/approach
After a revision of the existing literature and by using the methods from mathematical calculus, the authors have derived the logical relationships between the measures presented in this paper.
Findings
The main contribution of this paper is the proposal of a novel parameter, the so-defined ratio of two instantaneous discount rates, which the authors call the instantaneous variation rate, which allows relating some other measures of inconsistency, namely the measures described by Prelec and Rohde. A limitation of this paper is the unavailability of empirical information about the inconsistency measures needed to substantiate the theoretical findings. Indeed, this paper has social implications because recent behavioral and neuroeconomic studies have shown the existence of preference reversal or time inconsistency in other areas. The authors’ models can be implemented in these fields in order to better analyze the situations of inconsistency.
Originality/value
The originality of this paper lies in the authors’ aim to bring some order to the proposed measures of inconsistency which have arisen as a result of the different approaches adopted.
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Isabel María Parra Oller, Salvador Cruz Rambaud and María del Carmen Valls Martínez
The main purpose of this paper is to determine the discount function which better fits the individuals' preferences through the empirical analysis of the different functions used…
Abstract
Purpose
The main purpose of this paper is to determine the discount function which better fits the individuals' preferences through the empirical analysis of the different functions used in the field of intertemporal choice.
Design/methodology/approach
After an in-depth revision of the existing literature and unlike most studies which only focus on exponential and hyperbolic discounting, this manuscript compares the adjustment of data to six different discount functions. To do this, the analysis is based on the usual statistical methods, and the non-linear least squares regression, through the algorithm of Gauss-Newton, in order to estimate the models' parameters; finally, the AICc method is used to compare the significance of the six proposed models.
Findings
This paper shows that the so-called q-exponential function deformed by the amount is the model which better explains the individuals' preferences on both delayed gains and losses. To the extent of the authors' knowledge, this is the first time that a function different from the general hyperbola fits better to the individuals' preferences.
Originality/value
This paper contributes to the search of an alternative model able to explain the individual behavior in a more realistic way.
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Christian Diego Alcocer, Julián Ortegón and Alejandro Roa
The relevance of present consumption bias on personal finance has been confirmed in several studies and has important theoretical and practical implications. It has important…
Abstract
Purpose
The relevance of present consumption bias on personal finance has been confirmed in several studies and has important theoretical and practical implications. It has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings. The purpose of this paper is to contribute to our understanding of these issues by postulating a model of income uncertainty within a hyperbolic discounting framework that measures the cost of financial intertemporal inconsistencies related to this bias. The emphasis is on the analysis of this cost. We also propose experimental designs and consistent estimation methods, as well as agent-based modelling extensions.
Design/methodology/approach
The authors develop a finite-horizon model with hyperbolic preferences. Individuals have a present bias distinct from their discount rate so their choices face intertemporal inconsistencies. The authors further extend the analysis with uncertainty about future incomes. Specifically, individuals live for three periods, and the authors find the optimal consumption levels in the perfect-information benchmark by backward induction. They then proceed to add biases and uncertainty to characterize their implications and measure the costs of the intertemporal inconsistencies they cause.
Findings
The authors measure how an agent's utility is greater when they “tie their hands” than when they are free to re-evaluate and change their consumption schedule. This “cost of being vulnerable to falling into temptation” only depends (increasingly) on the measure of the present bias and (decreasingly) on the discount factor. They analyze the varying effects on utility and consumption of changes in impatience and optimism. They conclude by discussing theoretical and practical implications; they also propose agent-based simulations, as well as empirical and experimental designs, to further test the relevance and applications of the results.
Practical implications
This model has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings.
Social implications
The results enhance the estimation of the costs of present biases such that employers can better identify the incentives required to acquire and retain human capital. The authors provide evidence that workers are vulnerable to contract renegotiations and about the need for a regulator that restores ex-ante efficiency. Similarly, in the private sector, firms could recognize the postulated consumer profiles and focus their resources on anxious, too-optimistic or potentially addictive consumers; this, again, provides some justification about the need for a regulator.
Originality/value
In traditional exponential discounting, the marginal rate of substitution of consumption between two points depends only on their distance; thus, it allows none of the intertemporal inconsistencies we often observe in real life. Therefore, hyperbolic discounting better fits the data. The authors model choice under uncertainty and focus on the costs caused when present biases (ex-post) push behaviour away from ex-ante optimality. They conclude by proposing experimental designs to further enhance the estimation and implications of these costs. The postulated refinements have the potential to improve previous analyses on commitment devices and commitment-related regulation.
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Antonio Cutanda and Juan Alberto Sanchis Llopis
The purpose of this study is to estimate the housing wealth effect on non-durable consumption using data from the Spanish Survey of Household Finances (Encuesta Financiera de las…
Abstract
Purpose
The purpose of this study is to estimate the housing wealth effect on non-durable consumption using data from the Spanish Survey of Household Finances (Encuesta Financiera de las Familias, SHF) for the period 2002–2017.
Design/methodology/approach
The authors aim at identifying the effect of anticipated and unanticipated housing wealth changes on consumption with the sample of homeowners, following Paiella and Pistaferri (2017).
Findings
Results of this study lead us to conclude that there exists a strong housing wealth effect on consumption for the Spanish households.
Originality/value
The authors provide evidence against the permanent income model. They also analyse how the results change with income expectations, age and the household indebtedness rate. Finally, they detect a strong excess sensitivity to income.
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Our result of this paper aims to indicate that the beta pricing formula could be applied in a long-term model setting as well.
Abstract
Purpose
Our result of this paper aims to indicate that the beta pricing formula could be applied in a long-term model setting as well.
Design/methodology/approach
In this paper, we show that the capital asset pricing model can be derived from a three-period general equilibrium model.
Findings
We show that our extended model yields a Pareto efficient outcome.
Practical implications
The capital asset pricing model (CAPM) model can be used for pricing long-lived assets.
Social implications
Long-term modelling and sustainability can be modelled in our setting.
Originality/value
Our results were only known for two periods. The extension to 3 periods opens up a large scope of applicational possibilities in asset pricing, behavioural analysis and long-term efficiency.
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