Projection bias, sophistication, and sub-additive discounting

Behavioral studies have revealed the sub-additive discounting pattern,which is at odds with the prevailing hyperbolic discounting framework that explains intertemporal choices.In this study,we demonstrate that completely and partially sophisticated individuals who are aware of their shifting preferences over time may exhibit sub-additive discounting behaviors.More importantly,these behaviors are not determined by whether an individual has hyperbolic time preferences or not.Instead,we show that the choices of reference points and partial projection bias may be the underlying drivers of the observed sub-additive discounting.

INVENTORY REPLENISHMENT POLICY FOR THE DECISION MAKER WITH PRESENT-BIASED PREFERENCE AND TIME-INCONSISTENCY UNDER INFLATION

Due to bounded rationality, people often rush for instantaneous gratification if the decisions involve immediate rewards, but procrastinate if the decisions involve immediate costs. Present-biased preference and time-inconsistency will be more salient when people are making inter-temporal decisions to trade off rewards and costs in the future. People outweigh the present and their preference for the outcome in the furore will decline over time. Incorporating present-biased preference and time-inconsistency under quasi-hyperbolic discounting, time value of money under inflation and time-varying demand with shortages completely backlogged, we develop an inventory replenishment model for a deteriorating item. Inventory replenishment policies that benefit the decision maker are as follows. With the increase of time-inconsistency, one can increase ordering number and decrease fraction of shortages; with the increase of hazard rate within an upper limit, one can increase ordering number and decrease fraction of shortage; with the increase of compounded discount rate, one can increase ordering number and fraction of shortage. Hyperbolic discounting increases the ordering number and decreases the final profit, and the degree of hyperbolic discounting strengthens such outcomes. As a result, the optimal policy for a decision maker is to keep as rational as possible when making inter-temporal decisions.

Willingness to pay to reduce future risk:a fundamental issue to invest in prevention behaviour

At the core of the decision to invest in prevention are individuals who face immediate real costs against future and uncertain benefits.In this paper,we elicit subjects’willingness to pay to reduce future risk.In our experiments,subjects are given a cash endowment and a risky lottery.They report their willingness to pay to exchange the risky lottery for a safe one.Subjects play the lottery either immediately,eight weeks later,or 25 weeks later.Thus,both the lottery and the future are sources of uncertainty in our experiments.In two additional treatments,we control for future uncertainty with a continuation probability(a stopping rule),constant and independent across periods,that simulates the chances of not being able to return to play the lottery after 8 and 25 periods.We find evidence for a present bias in both the time-delay sessions and the continuation probability sessions,suggesting that this bias robustly persists in environments including both risk and future uncertainty.Therefore,eliciting prevention behaviour is a major challenge.