Noisy Time Preference

AbstractPeople’s desire to be patient or impatient can fluctuate from moment to moment, yet little is known about the effects of variability in time preference on intertemporal choice behavior. We examine this issue through the lens of an exponential discounting model with noisy discount factors. We show that such a model can generate decreasing patience over time, accounting for behavioral patterns typically attributed to hyperbolic discounting, while also making reasonable predictions regarding violations of intertemporal dominance. Additionally, two experiments reveal that many participants do display noise in their discount factors, and that a noisy discount factor model outperforms hyperbolic models in terms of quantitative fit. Ultimately the majority of participants are best described by some type of exponential discounting model (with or without noisy discount factors). These results indicate that it may not be necessary to assume alternate forms of non-exponential discounting, as long as the discount factors in an exponential model are permitted to vary at random. These results also highlight the importance of allowing for different sources of noise in choice modeling.

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