An Analysis of the Anomalies in Traditional Discounting Models

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Volume 4 Num. 1

Volume 4 Num. 1 - April 2004

An Analysis of the Anomalies in Traditional Discounting Models [Un Análisis de las Anomalías de los Modelos Tradicionales de Descuento]

Volume 4 Num. 1 - April 2004 - Pages 105-128

Authors:

Salvador Cruz Rambaud and María José Muñoz Torrecillas

Abstract:

The discounting utility model (DU model), introduced by Samuelson in 1937, has dominated the economic analysis of intertemporal choice being, along with the expected utility model (EU model), one of the widely used traditional discounting models. Nevertheless, several empirical studies, mainly arisen from the field of psychology, have described the individual behavior when discounting real or hypothetical rewards, showing the existence of “anomalies” or violations of the traditional discounting models (DU and EU) axioms. These “anomalies in intertemporal choice” have been labelled as: delay effect, magnitude effect, sign effect, sequence effect, delayspeedup asymmetry and spreading effect. Even hyperbolic discounting has been considered, by some authors, as an anomaly of intertemporal choice. In this paper, first we will describe these anomalies and how the experiments in the field of psychology have detected them. Starting from this empirical evidence, our aim is to include the effect of these anomalies in the mathematical expression of the discount functions describing the intertemporal choice of individuals. The empirical application of the traditional discounting models has shown the aforementioned anomalies which set the stage for a change in normative theory and for the searching of new discounting models.

Key words:

Intertemporal choice, anomalies, discount function, discount rate.

Full Article

English (PDF)

International Journal of Psychology and Psychological Therapy

Volume 4 Num. 1 - April 2004