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Journal of Risk and Uncertainty

, Volume 43, Issue 3, pp 169–203 | Cite as

Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting

  • Thomas EpperEmail author
  • Helga Fehr-Duda
  • Adrian Bruhin
Article

Abstract

A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people’s proneness to probability distortions.

Keywords

Time preferences Risk preferences Hyperbolic discounting Probability weighting Institutionally generated uncertainty 

JEL Classification

D01 D81 D91 

Notes

Acknowledgements

We thank Ernst Fehr, Drew Fudenberg, David Laibson, David Levine, Drazen Prelec, Peter Wakker and Herbert Walther for helpful comments. The usual disclaimer applies. This research is supported by the Swiss National Science Foundation (Grants 100012-109907 and 100014-120705). An earlier version of this paper, “Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting”, is available at http://www.iew.uzh.ch/wp/iewwp412.pdf.

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.ETH Zurich, Chair of EconomicsZurichSwitzerland

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