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Intertemporal choice under habit formation

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Decision-Making and Behavioral Economics Financial Literacy, Pension, Retirement Analysis Experimental Behavioral Economics Studies

Abstract

Many of the most important choices in people's lives have an inter-temporal dimension, i.e., these choices are associated with a flow of benefits or costs that accrue in the future. In addition, such choices are frequently habit- forming. Yet, little is known about habit-forming inter-temporal choice behavior. This paper reports the results of an inter-temporal choice experiment with habit-formation. Subjects' choices deviate systematically from individually optimal decisions in the direction of over consumption. This over- consumption is partly driven by loss avoidance, comparable to a real life situation in which addicted people consume addictive substances only in order to overpower withdrawal symptoms. Our results thus reject the theory of rational addiction.

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References

1999A Theory of Fairness, Competition, and Cooperation 1991Loss Aversion in Riskless Choice: A Reference-Dependent Model 1988A Theory of Rational Addiction 1998A Theory of Fairness, Competition and Cooperation 2000Motivation Crowding Theory: A Survey of Empirical Evidence 1997Anomalous behavior in public goods experiments: How much 2000A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Evidence 2000Motivation, Knowledge Transfer, and Organizational Forms

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