Variable time preference

Abstract

We re-examine behavioral patterns of intertemporal choice with recognition that time preferences may be inherently variable, focusing in particular on the explanatory power of an exponential discounting model with variable discount factors - the variable exponential model. We provide analytical results showing that this model can generate systematically different choice patterns from an exponential discounting model with a fixed discount factor. The variable exponential model accounts for the common behavioral pattern of decreasing impatience, which is typically attributed to hyperbolic discounting. The variable exponential model also generates violations of strong stochastic transitivity in choices involving intertemporal dominance. We present the results of two experiments designed to evaluate the variable exponential model in terms of quantitative fit to individual-level choice data. Data from these experiments reveal that allowing for a variable discount factor significantly improves the fit of the exponential model, and that a variable exponential model provides a better account of individual-level choice probabilities than hyperbolic discounting models. In a third experiment we find evidence of strong stochastic transitivity violations when intertemporal dominance is involved, in accordance with the variable exponential model. Overall, our analytical and experimental results indicate that exponential discounting can explain intertemporal choice behavior that was supposed to be beyond its descriptive scope if the discount factor is permitted to vary at random. Our results also highlight the importance of allowing for different sources of randomness in choice modeling.