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A Theory of Reference Time

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  • Ali al-Nowaihi
  • Sanjit Dhami

Abstract

We consider a discounted utility model that has two components. (1) The instan- taneous utility is of the prospect theory form, thus, allowing for reference dependent outcomes. (2) The discount function embodies a ‘reference time’ to which all future outcomes are discounted back to, hence, the name, reference time theory. We allow the discount function to exhibit declining impatience, as in hyperbolic discounting models, subadditivity or both. We show that if the discount function is non-additive, then the presence of a reference time has important effects on intertemporal choices. For instance, this helps to explain apparently intransitive choices over time. We also show how several recent approaches to time discounting can be incorporated within our proposed framework; these include attribute models and models of uncertainty.

Suggested Citation

  • Ali al-Nowaihi & Sanjit Dhami, 2013. "A Theory of Reference Time," Discussion Papers in Economics 13/26, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:13/26
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp13-26.pdf
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    References listed on IDEAS

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    1. Thomas Neukirchen & Matthias Klumpp, 2018. "Logistics Education and Behavioral Training Decisions, Time Distortion, and the Prae Ante View," Logistics, MDPI, vol. 2(4), pages 1-16, October.

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    More about this item

    Keywords

    Discounted utility models; Reference time theory; Prospect theory; Hyperbolic discounting; Subadditive discounting.;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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