Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Time-Inconsistent Preferences in Adam Smith and David Hume

Time-Inconsistent Preferences in Adam Smith and David Hume History of Political Economy 35:2 (2003) real-life experiences indicate that a discount curve more concave than an exponential curve may govern the subjects’ choices in the situations studied. Discount functions may thus be approximated by a hyperbola; that is, rewards t periods in the future are discounted by 1=.k1 C k2 t/, where the ki ’s are constants. 1 A function more concave than the usual exponential curve ¯ t produces intertemporal con ict, causing preferences to change between a given pair of alternatives as time elapses. This is because such a function discounts more heavily than the exponential function for events in the near future, but less heavily for events in the distant future. Therefore, preferences of decision makers with hyperbolic discount functions are dynamically inconsistent. Over the last few years a large literature has developed that studies various “behavioral anomalies.” In particular, there is a growing body of literature that studies the behavior of economic agents with hyperbolic discount functions, as well as the implications of such behavior. 2 In fact, some economists and psychologists argue that hyperbolic discounting may explain some of the behavioral anomalies that have been documented during the last decades.3 However, despite http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png History of Political Economy Duke University Press

Time-Inconsistent Preferences in Adam Smith and David Hume

History of Political Economy , Volume 35 (2) – Jun 1, 2003

Loading next page...
 
/lp/duke-university-press/time-inconsistent-preferences-in-adam-smith-and-david-hume-60ZRKx0BlB
Publisher
Duke University Press
Copyright
Copyright 2003 by Duke University Press
ISSN
0018-2702
eISSN
1527-1919
DOI
10.1215/00182702-35-2-241
Publisher site
See Article on Publisher Site

Abstract

History of Political Economy 35:2 (2003) real-life experiences indicate that a discount curve more concave than an exponential curve may govern the subjects’ choices in the situations studied. Discount functions may thus be approximated by a hyperbola; that is, rewards t periods in the future are discounted by 1=.k1 C k2 t/, where the ki ’s are constants. 1 A function more concave than the usual exponential curve ¯ t produces intertemporal con ict, causing preferences to change between a given pair of alternatives as time elapses. This is because such a function discounts more heavily than the exponential function for events in the near future, but less heavily for events in the distant future. Therefore, preferences of decision makers with hyperbolic discount functions are dynamically inconsistent. Over the last few years a large literature has developed that studies various “behavioral anomalies.” In particular, there is a growing body of literature that studies the behavior of economic agents with hyperbolic discount functions, as well as the implications of such behavior. 2 In fact, some economists and psychologists argue that hyperbolic discounting may explain some of the behavioral anomalies that have been documented during the last decades.3 However, despite

Journal

History of Political EconomyDuke University Press

Published: Jun 1, 2003

There are no references for this article.