This paper challenges the conventional wisdom dominating the social sciences and philosophy regarding temporal discounting, the practice of discounting the value of future utility when making decisions. Although there are sharp disagreements about temporal discounting, a kind of standard model has arisen, one that begins with a normative standard about how we should make intertemporal comparisons of utility. This standard demands that in so far as one is rational one discounts utilities at future times with an exponential discount function. Tracing (...) the justification for this standard through economics, philosophy and psychology, I’ll make what I believe is the best case one can for it, showing how a non-arbitrariness assumption and a dominance argument together imply that discounting ought to be exponential. Ultimately, however, I don’t find the case compelling. Non-exponential temporal discounting is often rational. If this is correct, Instead of trying to ‘fix’ non-exponential discounting because it is irrational and associated with negative life outcomes, we might instead focus attention on why the conditions obtain that make such discounting rational. (shrink)

Given the endowment effect, the role of attention in decision-making, and the framing effect, most behavioral economists agree that it would be a mistake to accept the satisfaction of revealed preferences as the normative criterion of choice. Some have suggested that what makes agents better off is not the satisfaction of revealed preferences, but ‘true’ preferences, which may not always be observed through choice. While such preferences may appear to be an improvement over revealed preferences, some philosophers of economics have (...) argued that they face insurmountable epistemological, normative, and methodological challenges. This article introduces a new kind of true preference – values-based preferences – that blunts these challenges. Agents express values-based preferences when they choose in a manner that is compatible with a consumption plan grounded in a value commitment that is normative, affective, and stable for the agent who has one. Agents who choose according to their plans are resolute choosers. My claim is that while values-based preferences do not apply to every choice situation, this kind of preference provides a rigorous way for thinking about classic choice situations that have long interested behavioral economists and philosophers of economics, such as ‘Joe-in-the-cafeteria.’. (shrink)

Recent evidence on intertemporal choice suggests that decision-makers may exhibit both increasing and decreasing impatience simultaneously, called inverse-S discounting. This paper introduces trichotomic discounted utility to model inverse-S discounting. Under trichotomic discounted utility the decision-maker distinguishes between short-term delays, medium-term delays, and long-term delays. Exponential discounting holds within each category, but not necessarily across each category. We provide preference foundations for trichotomic discounted utility in the timed outcomes framework and in the consumption streams framework. The key axiom is a weakening (...) of the time consistency axiom that allows for both increasing and decreasing impatience. We also consider a weak, local version of time consistency, and show that this plausible condition is satisfied only by discount functions with exponential “pieces”. (shrink)

Exponential discounted utility theory provides the normative standard for future discounting as it is employed throughout the social sciences. Tracing the justification for this standard through economics, philosophy and psychology, I’ll make what I believe is the best case one can for it, showing how a non-arbitrariness assumption and a dominance argument together imply that discounting ought to be exponential. Ultimately, however, I don’t find the case compelling, as I believe it is deeply flawed. Non-exponential temporal discounting is often rational–indeed, (...) the paragon of rationality. If this is correct, it’s an important point when considering policy interventions. Instead of trying to “fix” non-exponetial discounting because it is irrational and associated with negative life outcomes, we might instead focus attention on why the conditions obtain that make such discounting rational. (shrink)

This paper defends the viability of de-idealization strategies in economic modeling against recent criticism. De-idealization occurs when an idealized assumption of a theoretical model is replaced with a more realistic one. Recently, some scholars have raised objections against the possibility or fruitfulness of de-idealizing economic models, suggesting that economists do not employ this kind of strategy. We present a detailed case study from the theory of industrial organization, discussing three different models, two of which can be construed as de-idealized versions (...) of the first (the so-called Bertrand model of oligopoly). We conclude that recent pessimism about de-idealization in economics is largely unfounded, and that de-idealization strategies are not only possible but also widely employed in economics. (shrink)

Original and cumulative prospect theory differ in the composition rule used to combine the probability weighting function and the value function. We test the predictive power of these composition rules by performing a novel out-of-sample prediction test. We apply estimates of prospect theory’s weighting and value function obtained from two-outcome cash equivalents, a domain where original and cumulative prospect theory coincide, to three-outcome cash equivalents, a domain where the composition rules of the two theories differ. Although both forms of prospect (...) theory predict three-outcome cash equivalents very well, at the aggregate level, we find small but systematic under-prediction of cash equivalents for cumulative prospect theory and small but systematic over-prediction of cash equivalents for original prospect theory. We also observe substantial heterogeneity across subjects and types of gambles, some of which is accounted for by differences in the curvature and elevation of the weighting function across individuals. We also find differences in prediction related to whether the worst outcome is zero or non-zero. (shrink)

This paper defends the viability of de-idealization strategies in economic modeling against recent criticism. De-idealization occurs when an idealized assumption of a theoretical model is replaced with a more realistic one. Recently, some scholars have raised objections against the possibility or fruitfulness of de-idealizing economic models, suggesting that economists do not employ this kind of strategy. We present a detailed case study from the theory of industrial organization, discussing three different models, two of which can be construed as de-idealized versions (...) of the first. We conclude that recent pessimism about de-idealization in economics is largely unfounded, and that de-idealization strategies are not only possible but also widely employed in economics. (shrink)