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Viewing the Future through a Warped Lens: Why Uncertainty Generates Hyperbolic Discounting

Type of publication Peer-reviewed
Publikationsform Original article (peer-reviewed)
Author Epper Thomas, Fehr-Duda H., Bruhin A.,
Project Vertrauen verstehen. Grundlagen, Formen und Grenzen des Vertrauens
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Original article (peer-reviewed)

Journal Journal of Risk and Uncertainty
Volume (Issue) 5(43)
Page(s) 169 - 203
Title of proceedings Journal of Risk and Uncertainty

Open Access

Abstract

A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people’s proneness to probability distortions. Keywords Time preferences Risk preferences Hyperbolic discounting Probability weighting Institutionally generated uncertainty
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