Podcast
Questions and Answers
What does the discount factor δ represent in the context of utility streams?
What does the discount factor δ represent in the context of utility streams?
- The absolute value of all future utilities
- The increase in utility over time
- The diminishing value of future utility (correct)
- The total utility received today
How is the utility of receiving a dollar tomorrow calculated?
How is the utility of receiving a dollar tomorrow calculated?
- $u + δ$
- $δ × u$ (correct)
- $u × δ^2$
- $u / δ$
If today's utility is represented as $u_0$, what does $u_2$ represent?
If today's utility is represented as $u_0$, what does $u_2$ represent?
- Utility received today
- Utility received two days from now (correct)
- Utility received tomorrow
- Utility received three days from now
What is the relationship between exponential discounting and the evaluation of utility streams?
What is the relationship between exponential discounting and the evaluation of utility streams?
Which model accounts for the discrepancy between predicted and actual decision-making in relation to future utilities?
Which model accounts for the discrepancy between predicted and actual decision-making in relation to future utilities?
What is the formula for utility U0(u) according to the delta model?
What is the formula for utility U0(u) according to the delta model?
Which utility stream corresponds to the highest present value according to exponential discounting in the delta model?
Which utility stream corresponds to the highest present value according to exponential discounting in the delta model?
What does the parameter δ represent in the context of the delta model?
What does the parameter δ represent in the context of the delta model?
What are the implications of hyperbolic discounting contrasted with exponential discounting?
What are the implications of hyperbolic discounting contrasted with exponential discounting?
Which of these options best describes the term 'Present-Bias' within the delta model?
Which of these options best describes the term 'Present-Bias' within the delta model?
What is the primary focus of intertemporal choice?
What is the primary focus of intertemporal choice?
What model serves as a behavioral economic alternative to the standard exponential discounting model?
What model serves as a behavioral economic alternative to the standard exponential discounting model?
Which of the following concepts relates to the perceptions of value over time?
Which of the following concepts relates to the perceptions of value over time?
What term describes the decrease in perceived value of future rewards?
What term describes the decrease in perceived value of future rewards?
What does hyperbolic discounting suggest about people's decision-making?
What does hyperbolic discounting suggest about people's decision-making?
In what context might a person experience immediate benefits and deferred costs?
In what context might a person experience immediate benefits and deferred costs?
Which of these is NOT a limitation associated with the exponential discounting model?
Which of these is NOT a limitation associated with the exponential discounting model?
Which aspect does the delta model primarily examine?
Which aspect does the delta model primarily examine?
What characterizes the beta-delta model in behavioral economics?
What characterizes the beta-delta model in behavioral economics?
What value does the discount factor δ take when indifferent between $100 now and $160 in 1 year?
What value does the discount factor δ take when indifferent between $100 now and $160 in 1 year?
When comparing a present value of $100 and a future value of $1000, what does a calculated discount factor of δ = 0.32 imply about the individual?
When comparing a present value of $100 and a future value of $1000, what does a calculated discount factor of δ = 0.32 imply about the individual?
Which model incorporates both immediate and delayed rewards in intertemporal choice?
Which model incorporates both immediate and delayed rewards in intertemporal choice?
What is the relationship established when an individual is indifferent between two monetary options?
What is the relationship established when an individual is indifferent between two monetary options?
How is discounting sometimes expressed instead of using the discount factor?
How is discounting sometimes expressed instead of using the discount factor?
What utility value does $1000 yield when applying the utility function 0.5?
What utility value does $1000 yield when applying the utility function 0.5?
What is indicated by a higher discount factor in intertemporal choice?
What is indicated by a higher discount factor in intertemporal choice?
Which scenario represents a situation of present bias based on the beta-delta model?
Which scenario represents a situation of present bias based on the beta-delta model?
What is a significant limitation of exponential discounting?
What is a significant limitation of exponential discounting?
What does the delay speed-up asymmetry illustrate in behavioral economics?
What does the delay speed-up asymmetry illustrate in behavioral economics?
Which effect indicates that people often change their preferences over time?
Which effect indicates that people often change their preferences over time?
In the beta-delta model, what does β represent?
In the beta-delta model, what does β represent?
What behavior does time inconsistency describe in individuals?
What behavior does time inconsistency describe in individuals?
Which of the following is a feature of hyperbolic discounting as opposed to exponential discounting?
Which of the following is a feature of hyperbolic discounting as opposed to exponential discounting?
What does the 'magnitude effect' refer to in behavioral economics?
What does the 'magnitude effect' refer to in behavioral economics?
Which characteristic is NOT associated with quasi-hyperbolic discounting?
Which characteristic is NOT associated with quasi-hyperbolic discounting?
What is a defining feature of the beta-delta model in comparison to the delta model?
What is a defining feature of the beta-delta model in comparison to the delta model?
Under what condition does the beta-delta model reduce to the delta model?
Under what condition does the beta-delta model reduce to the delta model?
What happens when β < 1 in the beta-delta model?
What happens when β < 1 in the beta-delta model?
In the example involving cake, what utility does eating the cake provide on Saturday?
In the example involving cake, what utility does eating the cake provide on Saturday?
What is the utility gained from skipping the cake on Saturday if β = 0.5 and δ = 0.67?
What is the utility gained from skipping the cake on Saturday if β = 0.5 and δ = 0.67?
What does it mean if a person has present-biased preferences?
What does it mean if a person has present-biased preferences?
Which of the following actions illustrates impulsivity based on the beta-delta model?
Which of the following actions illustrates impulsivity based on the beta-delta model?
Which limitation is mentioned regarding the beta-delta model?
Which limitation is mentioned regarding the beta-delta model?
What phenomenon does quasi-hyperbolic discounting help to explain?
What phenomenon does quasi-hyperbolic discounting help to explain?
What is the expected utility of choosing to skip the cake on Friday according to the beta-delta model?
What is the expected utility of choosing to skip the cake on Friday according to the beta-delta model?
Which of the following actions would exhibit time inconsistency?
Which of the following actions would exhibit time inconsistency?
In the context of the beta-delta model, what does the parameter δ refer to?
In the context of the beta-delta model, what does the parameter δ refer to?
What type of bias is explained by the beta-delta model?
What type of bias is explained by the beta-delta model?
Which statement about utility streams is accurate within the beta-delta model?
Which statement about utility streams is accurate within the beta-delta model?
Flashcards
Intertemporal Choice
Intertemporal Choice
Involves making decisions that spread over time, with consequences in the future.
Exponential Discounting
Exponential Discounting
A model where the value of future rewards declines at a constant rate over time.
Discount Factor (δ)
Discount Factor (δ)
A mathematical tool in exponential discounting representing the rate at which future utility is discounted; it reflects our impatience for future rewards.
Utility Streams
Utility Streams
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Delta Model
Delta Model
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Discount Factor
Discount Factor
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Hyperbolic Discounting
Hyperbolic Discounting
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Beta-delta Model
Beta-delta Model
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Indifference Point
Indifference Point
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Discount Rates
Discount Rates
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Limitations of Exponential Discounting
Limitations of Exponential Discounting
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Discount Rate (r)
Discount Rate (r)
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Present Bias
Present Bias
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Calculating the Discount Factor
Calculating the Discount Factor
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Time Inconsistency
Time Inconsistency
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Present-Bias Parameter (β)
Present-Bias Parameter (β)
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Intentional Choice
Intentional Choice
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Strengths of the Beta-delta Model
Strengths of the Beta-delta Model
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Limitations of the Beta-delta Model
Limitations of the Beta-delta Model
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Preferences for Improving Sequences
Preferences for Improving Sequences
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Peak-End Rule
Peak-End Rule
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Sign Effect
Sign Effect
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Study Notes
Behavioural Economics
- Behavioural economics examines preferences, time, and utility maximisation in standard economic models.
- Intertemporal choice refers to decisions involving trade-offs between costs and benefits at different points in time.
- Examples include choosing between immediate benefits (e.g., a movie with friends) and deferred costs (e.g., cleaning the house) or vice-versa.
- Another example is purchasing a one-year warranty on a new computer, which involves a current loss (warranty cost) versus a possible future loss (repairing the computer).
Exponential Discounting
- Exponential discounting models preferences using a discount factor.
- In exponential discounting, the utility (U) is multiplied by the discount factor(δ to the power of t).
- The discount factor (δ) is a parameter between 0 and 1, representing the rate at which future utility diminishes relative to present utility.
- Values closer to 1 indicate greater patience, while values closer to 0 suggest significant impatience.
- The utility (U) of receiving a dollar today is multiplied by the discount factor (δ).
- Examples calculating the present value of future utility streams using this model are provided in the notes.
Utility Streams
- Utility streams represent a sequence of utilities over time.
- Uº(u) = u₀ + δu₁ + δ²u₂ + δ³u₃ + ... = Σ δ¹u₁ t=1
- 't' represents time, = 0 for today, t =1 tomorrow, etc.
- u₀ represents utility you receive today, u₁ is utility received tomorrow and so on.
Delta Model
- The δ-function is used to calculate the utility of a stream of future utilities at a starting time t=0, resulting in Uº(u)
- U°(u) = u₀ + δu₁ + δ²u₂ + δ³u₃ + ..
- Examples of how to apply the δ-function are presented.
- If δ = 0.9 then Uº(a)=1+2.7+3.24=6.94, Uº(b)=1.33 and for Uº(c)= 1.67.
Discount Rates
- Discount rates represent the rate at which future utility declines relative to present utility.
- The relationship between discount rates and discount factors is r = (1 - δ) / δ
- if δ = 0.79, r=0.27.
- Examples demonstrating the conversion between discount factors, and rates are provided in the notes
Limitations of Exponential Discounting
- The exponential discounting model, while useful, has limitations.
- The model assumes time-consistent preferences.
- Individuals' preferences over time may change, or they might value immediate gratification over a future reward, implying time inconsistency.
- Further shortcomings to the model are the "sign effect", "magnitude effect", "temporal loss aversion", "delay speed-up asymmetry & preference for improving sequences", and "date-delay effect & violations of independence."
Quasi-Hyperbolic Discounting (Beta-Delta Model)
- The beta-delta model extends the exponential model by introducing a present-bias parameter, β.
- This model can explain situations where a person's preferences are inconsistent over time. It assumes that future rewards are discounted less than other situations.
- The present bias implies more weight is given to rewards that occur immediately than future ones, meaning the future is often devalued. It assumes that the preference for a smaller, earlier reward is higher compared to a larger, later reward.
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