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Intertemporal decision-making and loss aversion

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QiaoX_2008redux.pdf (18.36Mb)
Date
2008
Author
Qiao, Xiao
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Abstract
 
 
This thesis is devoted to a novel approach to intertemporal decision-making. Specifically, it applies the reference-dependent model to intertemporal choices and shows that one can model intertemporal choice even without the assumption of time discounting.
 
In Chapter I, I present a brief review of the background literature, which could be of help for our understanding of intertemporal decision-making. Specifically, it focuses on three prominent economic theories, which are the most relevant for my work on intertemporal decision-making, namely, the exponential discounted utility theory, the hyperbolic discounting theory, the theory of reference-dependent preferences, and the similarity-based procedure.
 
In Chapter II, I present the intertemporal reference-dependent model composed of an intrinsic consumption utility and a reference-dependent gain-loss utility which are additively separable over time. Three simple ways of reference point determination - choice-set dependent, choice-set independent, and hybrid reference points are also explored. In addition, I also argue that the intertemporal reference-dependent model may offer an alternative explanation of the experimental observations by Rubinstein (2003). Furthermore, in Chapter III, I extend the intertemporal reference-dependent model, where an individual is uncertain about her future circumstances, and her reference levels follow a random walk process. While the model does not explicitly include time discounting and return on saving, it nevertheless may offer an alternative explanation of present bias and negative time preference (future bias), and may also offer an alternative explanation of dynamically inconsistent preferences over time.
 
Finally, in Chapter IV, using a survey-based within-subject choice experiment, I explore whether subjects' behaviour is consistent with a number of existing and emerging theories, namely hyperbolic discounting theory, Rubinstein's similarity procedure, and the novel intertemporal reference-dependent model. The main result of the survey-based within-subject choice experiment is that none of these three theories explain subjects' behaviour. However, I do find that, among these three theories, the novel intertemporal reference-dependent model performs no worse than Rubinstein's similarity procedure, and hyperbolic discounting theory performs the worst with subjects' behaviour on subset of questions. Moreover, I could reject the hypothesis that the subjects made their choices at random. Finally, I also found that their behaviour is not consistent with the Independence of Irrelevant Alternatives.
 
URI
http://hdl.handle.net/1842/33603
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