CeDEx workshop - Silvia Sonderegger (University of Nottingham)

Optimal similarity judgements in intertemporal choice

(joint with Fabrizio Adriani, University of Leicester)

Abstract: We use a simple cost-benefit analysis to derive "optimal" similarity judgments --addressing under which circumstances a decision maker should be able to distinguish between different time periods or different prizes. Our key premise is that cognitive ability is a scarce resource, to be deployed only where it really matters. We show that this simple insight can explain a number of observed anomalies: (i) time preference reversals, (ii) magnitude effects, (iii) interval length effects, (iv) cycles. A normative implication of our analysis is that sometimes people may be suffering from excessive tendency to postpone (rather than to anticipate) consumption, especially when taking decisions that concern faraway periods. Finally, we argue that our approach can also be fruitfully applied to study anomalies in risky choices.