Habits and the Anomalies in Intertemporal Choice

Citation: Luc Wathieu Habits and the Anomalies in Intertemporal Choice.
Internet Archive Scholar (search for fulltext): Habits and the Anomalies in Intertemporal Choice
Tagged:

Summary

The author in this paper analyzes a discounted-utility model under habit formation. Preferences are rational, in the sense that the decision maker correctly anticipates the habit formation process and behaves in a dynamically consistent manner. The author of the paper demonstrates that the two major intertemporal choice anomalies, decreasing impatience and negative time preference, can be explained and viewed as intuitive properties of a simple discounted utility model under habit formation. The author then explores the descriptive, prescriptive and normative values of this model. The model has prescriptive value because it allows one to predict and interpret actual behavior and from a normative standpoint, it has been argued that the decision maker may regard habit formation as a binding constraint and agree that classical discounted utility is an appealing ideal.