Intertemporal choice is the study of how people make choices about what and how much to do at various points in time, when choices at one time influence the possibilities available at other points in time. These choices are influenced by the relative value people assign to two or more payoffs at different points in time. Most choices require decision-makers to trade off costs and benefits at different points in time. These decisions may be about savings, work effort, education, nutrition, (...) exercise, health care and so forth. Since early in the twentieth century, economists have analyzed intertemporal decisions using the discounted utility model, which assumes that people evaluate the pleasures and pains resulting from a decision in much the same way that financial markets evaluate losses and gains, exponentially 'discounting' the value of outcomes according to how delayed they are in time. Discounted utility has been used to describe how people actually make intertemporal choices and it has been used as a tool for public policy. Policy decisions about how much to spend on research and development, health and education all depend on the discount rate used to analyze the decision. (shrink)

The life-cycle theory of saving behavior (Modigliani, 1988) suggests that humans strive towards an equal intertemporal distribution of wealth. However, behavioral life-cycle theory (Shefrin & Thaler, 1988) proposes that people use self-control heuristics to postpone wealth until later in life. According to this theory, people use a system of cognitive budgeting known as mental accounting. In the present study it was found that mental accounts were used differently depending on if the income change was positive or negative. This was shown (...) both in a representative nationwide sample of households and in a student sample. Respondents were more willing to cut down on their propensity to consume when faced with an income decrease than to raise it when the income increased. Furthermore, contrary to the predictions of behavioral life-cycle theory, it was found that the respondents adjusted their propensity to consume the most when the income increases or decreases took place immediately. Hence, it is suggested that theories of intertemporal choice (e.g., Loewenstein, 1988; Loewenstein & Prelec, 1992) provide a better account of the data than does the behavioral lifecycle theory. (shrink)

Mental accounting is a concept associated with the work of Richard Thaler. According to Thaler, people think of value in relative rather than absolute terms. They derive pleasure not just from an object’s value, but also the quality of the deal – its transaction utility (Thaler, 1985). In addition, humans often fail to fully consider opportunity costs (tradeoffs) and are susceptible to the sunk cost fallacy. Why are people willing to spend more when they pay with a credit card than (...) cash (Prelec & Simester, 2001)? Why would more individuals spend $10 on a theater ticket if they had just lost a $10 bill than if they had to replace a lost ticket worth $10 (Kahneman & Tversky, 1984)? Why are people more likely to spend a small inheritance and invest a large one (Thaler, 1985)? According to the theory of mental accounting, people treat money differently, depending on factors such as the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting (Thaler, 1999). An important term underlying the theory is fungibility, the fact that all money is interchangable and has no labels. In mental accounting, people treat assets as less fungible than they really are. Even seasoned investors are susceptible to this bias when they view recent gains as disposable “house money” (Thaler & Johnson, 1990) that can be used in high-risk investments. In doing so, they make decisions on each mental account separately, losing out the big picture of the portfolio. (See also partitioning and pain of paying for ideas related to mental accounting.) . (shrink)

Two experiments with undergraduates as subjects were carried out with the aim of replicating and extending previous results showing that the implication of the behavioral life-cycle hypothesis (H. M. Shefrin & R. H. Thaler, 1988) that people classify assets in different mental accounts (current income, current assets, and future income) may explain how consumption choices are influenced by temporary income changes. In both experiments subjects made fictitious choices between paying for a good in cash or according to a more expensive (...) installment plan after they had received an income which was either less, the same, or larger than usual. In Experiment 1 subjects were supposed to have savings so that the total assets were equal, whereas in Experiment 2 the total assets varied. The results of both experiments supported the role of mental accounts in demonstrating that subjects were unwilling to pay in cash after an income decrease even though they had access to saved money. Thus, in effect they chose to pay more for the good than they had to. Indicating a need for further refinement of the concept of mental account, choices to pay in cash after an income decrease tended to be more frequent when the consumption and savings motives were compatible than when they were incompatible. Furthermore, increasing the total assets made subjects more willing to pay in cash after an income decrease. (shrink)

Two experiments with undergraduates as subjects tested explanations of how a prior temporary income change influences choices between buying and deferred buying. In Experiment 1 predictions from the behavioral life-cycle theory (Shefrin & Thaler, 1988), the renewable resources model (Linville & Fischer, 1991) and the loss-sensitivity principle (Garling & Romanus, 1997) were contrasted. The results are inconsistent with the latter two explanations since the framing of buying as positive (buying a new model of a product) or negative (replacing a broken (...) product) did not interact with the income change. Congruent with the behavioral life-cycle theory, willingness to buy was greater when subjects received a temporary income increase than when they received a temporary income decrease although total assets were equal. Further support for the behavioral life-cycle theory is obtained in Experiment 2 where four income-change conditions and durable and nondurable goods are compared. (shrink)

In lieu of an abstract, here is a brief excerpt of the content:Epistemic Leaks and Epistemic Meltdowns: A Response to William Morris on Scepticism with Regard to Reason Mikael M. Karlsson I. In an excellent paper which appeared in the April, 1989 issue of this journal,2 William Morris attemptsto demonstrate thatthe arguments which make up Hume's notorious chapter, "Of scepticism with regard to reason, are, in the first place, coherent—both internally and with the overall strategy of the Treatise—and, in (...) the second place, successful. Morris' paper is an exercise in the noble art of what I style constructive exegesis, an enterprise to which many readers of Hume Studies, and myself as much as any, are committed. It is a guiding principle ofthis art that we donotunderstandaphilosophical textuntil we can interpret it in such a way as to render it both coherent and correct. From this point ofview, coherence and correctness are not as independent of one another as they may seem to be to others who are differently committed. Some texts, such as Hume's chapter, "Ofscepticism with regard to reason," are notoriously resistant to constructive exegesis, despite the formidable bag of tricks which scholars and interpreters have developed; so resistant, that in gloomier moments we may be brought to wonder about our interpretative enterprise itself. Constructive exegesis is indeed a strange, and peculiarly optimistic, enterprise. Someday, I imagine, in a leisurely moment, I will think more reflectively about the principles ofour art. But not now.6 As a fellow practitioner of constructive exegesis, I am in full sympathy with what Morris tries to do in his paper; and I think that he does contribute substantially to our understanding of what Hume is up to in the chapter, "Ofscepticism with regard to reason." The third section of Morris' paper is, in my judgement, particularly successful in showing how Hume's chapter fits into the larger framework of the Treatise: Hume is, we see, attacking both what Morris labels "intellectualist rationalism" and its counterpart, which we may call 'unmitigated scepticism', although the chapter's two main arguments go primarily to the former. I also think that Morris gives very helpful, Volume XVI Number 2 121 MIKAEL M. KARLSSON and to my mind accurate, accounts of these two arguments, which I dub, respectively, the epistemic leak argument, and the epistemic meltdown argument. However, I have personally never found either of these arguments remotely convincing; and I still do not, despite Morris' clarification and defense. In what follows, I shall indicate some ofthe reasons for my dissatisfaction.?. Theepistemicleakargumentpurportsto"prove"(in Hume's sense)that reason or demonstration cannot support knowledge. Morris rightlyreminds us that whatHume meansby knowledge is perfect assurance or conviction: Knowledge is, in short, subjective certainty. This has caused confusion, for this is not what we usually mean nowadays by knowledge; nor was it what people, philosophers included, generally meant prior to Descartes. In Hume itis the product ofthe attempttoresolve all epistemic statesintomental eventsorwhat he calls "perceptions." In any case, we must—as Morris rightly explains—be clear that the epistemic leak argument is aimed at showing that demonstration cannot supportperfect conviction. Inoutline, the argumentissimple: Itworks, asMorrismakes clear, by shifting attention away from the subject-matter or "objects" of demonstration, that is, relations of ideas, to the exercise of demonstrative reason by human agents. The necessity of relations of ideas may suggest to us that we can be certain about them. Against this, one may point out that people do err in the conclusions arrived at by demonstration; this presumably shows that our (rational) understandingis fallible. And once we recognize this, our confidence in any conclusion produced by exercising this facultyislessened—thus do we move from knowledge, or subjective certainty, toprobability: belief, or imperfect conviction. Arguments ofthis general type (we can call them, using Descartes' famous figure, Totten-apple arguments ) were around long before Hume, although they were more commonly directed against the senses than against reason. We find them in antiquity—in Plato and Sextus Empiricus, for instance —and in Descartes, in parallel passages in the Discourse on Method, the First Meditation and the Principles of Philosophy, wherein one can discern a version directed precisely against reason and demonstration.12 To find out what, if anything, Hume has... (shrink)