Preferences that make economic models explode
February 2, 2014 Leave a comment
Commenting on experiments — showing time-preferences-switching framing effects — performed by experimental economist David Eil, Noah Smith writes:
Now, here’s the thing…it gets worse … I’ve heard whispers that a number of researchers have done experiments in which choices can be re-framed in order to obtain the dreaded negative time preferences, where people actually care more about the future than the present! Negative time preferences would cause most of our economic models to explode, and if these preferences can be created with simple re-framing, then it bodes ill for the entire project of trying to model individuals’ choices over time.
This matters a lot for finance research. One of the big questions facing finance researchers is why asset prices bounce around so much. The two most common answers are A) time-varying risk premia, and B) behavioral “sentiment”. But Eil’s result, and other results like it, could be bad news for…
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