Many people display something like hyperbolic discounting. Some businesses thriv

Question

Many people display something like hyperbolic discounting. Some businesses thrive on supporting this sort of short-term excess. For example, several establishments offer payday loansshort-term loans with ultrahigh interest rates designed to be paid off the next time the person is paid.

a) Suppose you were considering opening such a payday loan establishment. Given that hyperbolic discounters often fail to follow through on plans, how could you structure the loans to ensure payment? Use the quasi-hyperbolic model to make your argument. present bias: not gonna have $ to pay back

b) The absolute-magnitude effect suggests that people are much closer to time consistency with regard to larger amounts. How might this explain the difference in the structure of consumer credit (or short-term loans) and banks that make larger loans?

c) Lotteries often offer winners an option of receiving either an annual payment of a relatively small amount that adds up to the full prize over a number of years or a one-time payment at a steep discount. Describe how time inconsistency might affect a lottery winner’s decision. How might the lottery winner view her decision after the passage of time?

Explanation / Answer

Hyperbolic discounting is a time inconsistent model of discounting . The problem is that such form of discounting is usually violated .Usually the valuation falls by a constant factor per unit per day .Like deciding to have a dollar today or save it to get four dollars tomorrow .The same model can be used in discrete time called quasi hyperbolic approximation fqh(0)=1 , like fqh(D)= B*QD   also called beta delta prefrences . This helps to identify is the future gains are profitable or not considering the uncertainities attached with the risk and uncertainties . Hence time inconsistencies will impact the decisions ,because they will calculate n no of days for return or the amount of profit earned .The higher time inconsistency lower will be the investment in lottery taken

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