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Understanding intertemporal choices

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  • Enrica Carbone

Abstract

Previous experimental results show clearly that many subjects do not optimize when solving a life-cycle consumption problem. What do they do? This paper attempts to resolve this question, looking at the discounting, hyperbolic and rolling models as possible explanations. Data from two experiments (one an experiment with a typical subject pool and the second an experiment with subjects from the CentER panel) is used, and the advantage of having experimental data is exploited, which means that one can actually estimate the hyperbolic model. It is shown that the (exponential) discounting model appears to give the best explanation - suggesting that subjects do look ahead (as they should) but increasingly less as time passes (as they should not in the context of these experiments).

Suggested Citation

  • Enrica Carbone, 2006. "Understanding intertemporal choices," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 889-898.
    • Handle: RePEc:taf:applec:v:38:y:2006:i:8:p:889-898
    DOI: 10.1080/00036840500399313
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    References listed on IDEAS

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    1. Hey, John D & Dardanoni, Valentino, 1987. "Optimal Consumption under Uncertainty: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 98(390), pages 105-116, Supplemen.
    2. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
    3. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-957, July.
    4. Kivilcim Metin Ozcan & Asli Gunay & Seda Ertac, 2003. "Determinants of private savings behaviour in Turkey," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1405-1416.
    5. Enrica Carbone, 2005. "Demographics and Behaviour," Experimental Economics, Springer;Economic Science Association, vol. 8(3), pages 217-232, September.
    6. Enrica Carbone & John D. Hey, 2004. "The effect of unemployment on consumption: an experimental analysis," Economic Journal, Royal Economic Society, vol. 114(497), pages 660-683, July.
    7. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.
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    Cited by:

    1. Nobuyuki Hanaki & Yuta Shimodaira, 2024. "Wealth preferences and wealth inequality: Experimental evidence," ISER Discussion Paper 1260, Institute of Social and Economic Research, Osaka University.
    2. John Duffy & Yue Li, 2016. "Lifecycle Consumption Under Different Income Profiles: Experimental Evidence," Working Papers 161702, University of California-Irvine, Department of Economics.
    3. Carbone, Enrica & Duffy, John, 2014. "Lifecycle consumption plans, social learning and external habits: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 413-427.
    4. Thomas Meissner, 2016. "Intertemporal consumption and debt aversion: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 281-298, June.
    5. Dina Tasneem & Audrey Azerot & Marine de Montaignac & Jim Engle-Warnick, 2018. "A Laboratory Study of the Effect of Financial Literacy Training on Retirement Savings," CIRANO Working Papers 2018s-24, CIRANO.
    6. T. Ballinger & Eric Hudson & Leonie Karkoviata & Nathaniel Wilcox, 2011. "Saving behavior and cognitive abilities," Experimental Economics, Springer;Economic Science Association, vol. 14(3), pages 349-374, September.
    7. Duffy, John & Li, Yue, 2019. "Lifecycle consumption under different income profiles: Evidence and theory," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 74-94.
    8. Dina Tasneem & Jim Engle-Warnick, 2018. "Decision Rules for Precautionary and Retirement Savings," CIRANO Working Papers 2018s-22, CIRANO.
    9. Miller, Logan & Rholes, Ryan, 2023. "Joint vs. Individual performance in a dynamic choice problem," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 897-934.
    10. Ngo, Jacqueline & Smith, Alexander, 2020. "A public good game with technological growth," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    11. Dina Tasneem & Marine de Montaignac & Jim Engle-Warnick & Audrey Azerot, 2018. "A Laboratory Study of Nudge with Retirement Savings," CIRANO Working Papers 2018s-23, CIRANO.
    12. Enrica Carbone, 2008. "Temptations and Dynamic Consistency," Theory and Decision, Springer, vol. 64(2), pages 229-248, March.
    13. John Duffy, 2022. "Why macroeconomics needs experimental evidence," The Japanese Economic Review, Springer, vol. 73(1), pages 5-29, January.
    14. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    15. Bachmann, Kremena & Lot, Andre & Xu, Xiaogeng & Hens, Thorsten, 2023. "Experimental Research on Retirement Decision-Making: Evidence from Replications," Journal of Banking & Finance, Elsevier, vol. 152(C).
    16. John Duffy & Enrica Carbone, 2013. "Lifecycle Consumption Plans, Social Learning and External Habits: Experimental Evidence," Working Paper 513, Department of Economics, University of Pittsburgh, revised Sep 2013.

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