Henkel, Rudolph

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  • Publication
    Essays on Multiple Selves and Temporal Framing
    (2015-01-01) Henkel, Rudolph
    There exist numerous documented behavioral deviations from standard discounted utility maximizing behavior. These include time inconsistency, violations of the axiom of independence of irrelevant alternatives, preferences for commitment, and preferences over the timing of information. I develop two novel models which provide new insights into, and plausible explanations for, several of these deviations. In the first model, Multiself Bargaining, I propose a dual-self model in which two selves have conflicting preferences over the action to be taken by an agent. The selves have identical payoff utility, and only differ in their time preference factor. The default action of the agent is modeled as the outcome of a Tullock contest among the selves, where the self who wins chooses their preferred action. Viewing the outcome of this contest as the point of disagreement, the selves are allowed to negotiate to a mutually preferred outcome, and this negotiation is modeled as a Nash bargaining problem. I show that many of the deviations of interest are generated by this model, including time inconsistent behavior, such as diminishing impatience, as well as violations of independence of irrelevant alternatives in choice problems. Notably the preference reversals from time inconsistency are “smooth”, as opposed to the singular reversal in quasi-hyperbolic discounting, the standard model used in the literature. In the second model, Temporal Reference Points, I develop an alternate form of prospect evaluation in which agents form a set of subjectively important points in time in the life of a prospect, termed “temporal reference points.” When determining the present value of a prospect, agents discount based on the time between each of these temporal reference points, as opposed to based on the entire time between the present and the payout of the prospect. Under restrictions on the formation of temporal reference points, diminishing impatience in an agent is shown to be equivalent to a preference for informational updates occurring at the same time. Finally, the model is shown to allow the novel resolution of an apparent conflict in the experimental evidence on diminishing impatience.