Articlehybrid2014

Finite horizon consumption and portfolio decisions with stochastic hyperbolic discounting

46 citations0/0 files storedJournal of Mathematical Economics

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Stochastic processes and financial applications Financial Literacy, Pension, Retirement Analysis Decision-Making and Behavioral Economics

Abstract

We study finite horizon consumption and portfolio decisions of time-inconsistent individuals by incorporating the stochastic hyperbolic preferences of Harris and Laibson (2013) into the classical model of Merton (1969, 1971) with constant relative risk aversion (CRRA). We obtain closed-form solutions for optimal consumption and portfolio choices for sophisticated individuals with log utility and numerical solutions for those with power utility. Compared to the results of Merton, we find that stochastic hyperbolic discounting increases the consumption rate but has no effect on the share of wealth invested in the risky asset.

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References

1971Optimum consumption and portfolio rules in a continuous-time model 1969Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case 1999Doing It Now or Later 1955Myopia and Inconsistency in Dynamic Utility Maximization 1973Myopia and Inconsistency in Dynamic Utility Maximization 1992Anomalies in Intertemporal Choice: Evidence and an Interpretation 1981An Economic Theory of Self-Control 1977An Economic Theory of Self-Control

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