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Procrastination and intertemporal consumption: A three-period extension of the CAPM with irrational agents

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  • Habis, Helga

Abstract

In this paper, we investigate the capital asset pricing model (CAPM) derived from a three-period general equilibrium model incorporating time-inconsistent preferences. We define and consider two types of agents, i.e. they can be either sophisticated or naive. Sophisticated agents take into account their potentially changing future preferences when making a decision. Naive agents, on the other hand, do not anticipate this issue and their related self-control problems when they plan the consumption path.

Suggested Citation

  • Habis, Helga, 2024. "Procrastination and intertemporal consumption: A three-period extension of the CAPM with irrational agents," Finance Research Letters, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:finlet:v:63:y:2024:i:c:s1544612324003556
    DOI: 10.1016/j.frl.2024.105325
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    References listed on IDEAS

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    1. R. A. Pollak, 1968. "Consistent Planning," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 201-208.
    2. Charles M. Harvey, 1986. "Value Functions for Infinite-Period Planning," Management Science, INFORMS, vol. 32(9), pages 1123-1139, September.
    3. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    4. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    5. Habis, Helga & Herings, P. Jean-Jacques, 2011. "Core concepts for incomplete market economies," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 595-609.
    6. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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    8. Helga Habis, 2024. "A three-period extension of the CAPM," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 51(9), pages 200-211, February.
    9. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
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    More about this item

    Keywords

    General equilibrium; CAPM; Intertemporal choice; Pareto efficiency; Naive; Sophisticated;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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