AEM 2020 Module 3

Intertemporal Choice and Behavioral Biases

Intertemporal Choice

The decision-making process regarding how to allocate resources, such as wealth and time, between present and future consumption.

Present Bias

A cognitive bias where individuals give stronger preference to immediate rewards over future rewards, leading to procrastination and suboptimal decision-making.

Utility

A measure of satisfaction or value derived from consuming goods and services; used in economic theories to explain preferences.

Discounted Sum of Utilities

A method to evaluate options over time by adjusting future utilities to present value, reflecting the preference for sooner rewards.

Sophisticates

Individuals who are aware of their future self-control problems and correctly predict their future preferences.

Naives

Individuals who are unaware of their future self-control problems and mistakenly believe they will maintain the same preferences in the future.

Opportunity Costs

The potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.

Procrastination

The act of delaying or postponing tasks, often due to present bias or the undervaluation of future costs.

Projection Bias

A cognitive bias wherein individuals mispredict their future tastes or preferences based on their current state.

Loss Aversion

A behavioral economic principle stating that losses are felt more acutely than equivalent gains, influencing decision-making.

Probability Weighting

The tendency for people to overestimate the likelihood of low-probability events and underestimate high-probability events when making decisions.