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Weighted discounting—On group diversity, time-inconsistency, and consequences for investment

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  • Ebert, Sebastian
  • Wei, Wei
  • Zhou, Xun Yu

Abstract

This paper presents the class of weighted discount functions, which contains the discount functions commonly used in economics and finance. Weighted discount functions may describe the discounting behavior of groups, uncertainty about what discount rate to use, present-biased time preferences, and all of these simultaneously. As an application, we study investment behavior under weighted discounting and come up with the following general result: Greater group diversity, greater parameter uncertainty, and more present-biased time preferences lead to delayed investment or, equivalently, more risk-taking.

Suggested Citation

  • Ebert, Sebastian & Wei, Wei & Zhou, Xun Yu, 2020. "Weighted discounting—On group diversity, time-inconsistency, and consequences for investment," Journal of Economic Theory, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053118305295
    DOI: 10.1016/j.jet.2020.105089
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    2. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2022. "Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting," Journal of Economic Theory, Elsevier, vol. 204(C).
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    6. Shuoqing Deng & Xiang Yu & Jiacheng Zhang, 2023. "On time-consistent equilibrium stopping under aggregation of diverse discount rates," Papers 2302.07470, arXiv.org, revised Dec 2023.
    7. De Donno, Marzia & Menegatti, Mario, 2024. "Preferences on discounting under time risk," Journal of Mathematical Economics, Elsevier, vol. 113(C).
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    9. Zongxia Liang & Fengyi Yuan, 2023. "Weak equilibria for time‐inconsistent control: With applications to investment‐withdrawal decisions," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 891-945, July.
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    11. P. Koundouri & G. I. Papayiannis & E. V. Petracou & A. N. Yannacopoulos, 2024. "Consensus Group Decision Making Under Model Uncertainty with a View Towards Environmental Policy Making," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(6), pages 1611-1649, June.

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    More about this item

    Keywords

    Diversity; Hyperbolic discounting; Investment; Parameter uncertainty; Time inconsistency; Weighted discounting;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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