Take your Time or Take Your Chance: Time Discounting as a Distorted Probability

Abdellaoui, Mohammed;Kemel, Emmanuel;Vieider, Ferdinand;Panin, Amma
(2018)

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Authors
  • Abdellaoui, MohammedHEC
    Collaborator
  • Kemel, EmmanuelHEC
    Collaborator
  • Vieider, FerdinandUGhent
    Collaborator
  • Panin, AmmaUCLouvain
    Author
Abstract
In an experimental setup explicitly invoking the intertwined nature of risk and time, we convert the time delay with which an outcome is received into a subjective probability to immediately obtain that same outcome. Under the standard model of discounted expected utility (DEU), such a probability simply measures time discount- ing. In contrast to the prediction of DEU, we observe however that time discounting thus obtained systematically differs from discounting based on risk-free tradeoffs of outcomes. We then show that, once we adopt a behavioral generalization of DEU, the aforementioned time discounting results from a distorted probability, where the distortion has two main sources. The first comes from the difference between utility for risk and intertemporal substitution. The second stems from non-linear probability weighting. Once these two behavioral anomalies are factored out, discounting becomes invariant to the presence or absence of risk in intertemporal tradeoffs of outcomes.
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Panin, A. (2018). Take your Time or Take Your Chance: Time Discounting as a Distorted Probability. https://hdl.handle.net/2078.5/110313