Self Control

"Self-control means controlling emotions. Some investors value dividends for self-control reasons as well as for reasons that stem from hedonic editing."
Shefrin, (2000 p. 30)

McClure et al. (2004) have recently investigated the neural systems that underle decisions about delayed gratification. Much research has suggested that people tend to behave impatiently today but plan to act patiently in the future. For instance, when offered a choice between �10 today and �11 tomorrow, many people choose the immediate option. However, if asked today to choose between �10 in a year, and �11 in a year and a day, many people who went for the ‘immediate’ option in the first case now go for the second option. Montier (2007, p. 13–14)

hyperbolic discounting = discount rate declines over time


For its simplicity, the exponential discounting assumption is the most commonly used in economics. However, some alternatives have more empirical support.

Economics most commonly assumes exponential discounting

the most commonly used discount function

The discount function used in economic models For its simplicity, the exponential discounting assumption is the most commonly used in economics.

"Given two similar rewards, humans show a preference for one that arrives sooner rather than later. Humans are said to discount the value of the later reward, by a factor that increases with the length of the delay. In behavioral economics, hyperbolic discounting is a particular mathematical model thought to approximate this discounting process; that is, it models how humans actually make such valuations. Hyperbolic discounting is sharply different in form from exponential discounting, a rational function used in finance used in the analysis of choice over time. Hyperbolic discounting has been observed in humans and animals." [wiki]

Many examples exist in the financial world, for example, where it is logically reasonable to assume that there is an implicit risk that the reward will not be available at the future date, and furthermore that this risk increases with time. which is exactly the hyperbolic discount rate.

In hyperbolic discounting, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This contrasts with exponential discounting, in which valuation falls by a constant factor per unit delay, regardless of the total length of the delay.

Subjects using hyperbolic discounting reveal a strong tendency to make choices that are inconsistent over time. In other words, they make choices today that their future self would prefer not to make, despite using the same reasoning. This dynamic inconsistency happens because hyperbolic discounts value future rewards much more than exponential discounting.

"self-control (the ability to override our urges)"
Montier (2010, p. 11)

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