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The Economics of ConsumptionTheory and Evidence$
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Tullio Jappelli and Luigi Pistaferri

Print publication date: 2017

Print ISBN-13: 9780199383146

Published to Oxford Scholarship Online: October 2017

DOI: 10.1093/acprof:oso/9780199383146.001.0001

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Non-Standard Preferences

Non-Standard Preferences

Chapter:
(p.257) Chapter 14 Non-Standard Preferences
Source:
The Economics of Consumption
Author(s):

Tullio Jappelli

Luigi Pistaferri

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199383146.003.0014

In the real world many facts appear to conflict with the assum ptions of the standard life-cycle model and its main hypotheses. The mental accounting model challenges the assumption that resources are fungible. Substantial evidence produced by psychology, laboratory experiments, and empirical studies points out that people do not make time-consistent decisions, leading to the analysis of time-inconsistent preferences and hyperbolic discounting, a model in which rational agents make time-inconsistent decisions. A third critique is that people are in fact not fully informed about financial opportunities (the equity premium, say, or the virtue of diversification). In this chapter we review the literature on financial sophistication. A final departure from the standard approach explicitly models another important fact of life, namely, that our own choices are affected by the choices of other consumers, owing to social preferences.

Keywords:   behavioral models, mental accounting, time-inconsistent preferences, hyperbolic discounting, financial sophistication, social preferences

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