page_title: Behavioral economics
section_title: Intertemporal choice
hierarchical_section_title: Behavioral economics / History / Intertemporal choice
caption_attribution_description: English: Dr. David Laibson, Professor of Economics at Havard, presenting a session on "Behavioral Finance: Insights into Decision Making" at Charles Schwab Institutional Impact 2007 at the Mandalay Bay Convention Center, Las Vegas, Nevada, United States.
context_page_description: Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory.
  Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory. The study of behavioral economics includes how market decisions are made and the mechanisms that drive public choice. The three prevalent themes in behavioral economics are:
  Heuristics: Humans make a significant proportion of their decisions using mental shortcuts or rules of thumb.
  Framing: The collection of anecdotes and stereotypes that make up the mental filters individuals rely on to understand and respond to events.
  Market inefficiencies: These include mis-pricing and non-rational decision making.
  In 2002, psychologist Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty."
context_section_description: Behavioral economics has been applied to intertemporal choice, which is defined as making a decision and having the effects of such decision happening in a different time. Intertemporal choice behavior is largely inconsistent, as exemplified by George Ainslie's hyperbolic discounting—one of the prominently studied observations—and further developed by David Laibson, Ted O'Donoghue and Matthew Rabin. Hyperbolic discounting describes the tendency to discount outcomes in the near future more than outcomes in the far future. This pattern of discounting is dynamically inconsistent (or time-inconsistent), and therefore inconsistent with basic models of rational choice, since the rate of discount between time t and t+1 will be low at time t-1 when t is the near future, but high at time t when t is the present and time t+1 is the near future.
  This pattern can also be explained through models of sub-additive discounting that distinguish the delay and interval of discounting: people are less patient (per-time-unit) over shorter intervals regardless of when they occur.
caption: David Laibson, professor of economics at Harvard University
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