EXPECTATIONS AND INTERTEMPORAL CHOICE

This dissertation attempts to revise the current conception of intertemporal decision making by recognizing that, in the decision-making process, expectations of future outcomes may themselves become objects of economic choice. This proposition is first developed in general terms and then applied to several specific topics such as choices involving the timing of outcomes, the evaluation of certain and uncertain future outcomes, and the determination of optimistic versus pessimistic assessments concerning future probabilistic outcomes.; The dissertation draws on the research and theory of social and cognitive psychologists. There has been considerable exchange between economists and psychologists over the topic of decision making under uncertainty, but not in the area of intertemporal choice.; The dissertation also incorporates insights from classical and early neoclassical economists about utility and intertemporal choice and contrasts them with those of later economists such as Fisher and Samuelson.; Experimental results reported on and discussed include the finding that people often get unpleasant outcomes over with quickly or delay those that they desire, thus implicitly manifesting negative discount rates. A theory of intertemporal choice under certainty is formulated which can account for these and other patterns of intertemporal choice behavior that are incompatible with discounted utility maximization. The model of intertemporal choice under certainty is then extended to the case of uncertain outcomes. Consideration of the effect of uncertainty on utility from expectations leads to further predictions, such as that risk aversion should depend in a systematic manner on the delay prior to outcome resolution, and that delayed uncertain outcomes should be discounted less than their equally delayed certainty equivalents. Finally, the dissertation focuses on expectation formation itself, arguing that if expectations are sources of utility then the individual has an incentive to manipulate his own expectations. As an application of this insight, it is shown that individuals become more pessimistic as they wait for important uncertain outcomes to be revealed, in a manner that permits them to savor their expectations when the outcome is distant and to protect themselves from disappointment when outcome revelation becomes imminent. (Abstract shortened with permission of author.)...