A new test of convexity–concavity of discount function

• Published in: Theory and decision Vol. 89; no. 2; pp. 121 - 136
• Main Authors: Blavatskyy, Pavlo R., Maafi, Hela
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.09.2020; Springer Nature B.V; Springer Verlag
• Subjects: Behavioral/Experimental Economics; Bias; Concavity; Convexity; Diminishing marginal utility; Discount rates; Discounting; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Entrepreneurship; Expected utility; Experiments; Finance; Game Theory; Generalizations; Humanities and Social Sciences; Insurance; Laboratories; Lotteries; Management; Operations Research/Decision Theory; Preferences; Research subjects; Social and Behav. Sciences; Statistics for Business; Utilities; Utility functions; Utility theory; Weighting; Discounted utility; Convexity; Discount function; Intertemporal choice; Time preference
• ISSN: 0040-5833; 1573-7187
• DOI: 10.1007/s11238-020-09747-3

Discounted utility theory and its generalizations (e.g., quasihyperbolic discounting, generalized hyperbolic discounting) use discount functions for weighting utilities of outcomes received in different time periods. We propose a new simple test of convexity–concavity of discount function. This test can be used with any utility function (which can be linear or not) and any preferences over risky lotteries (expected utility theory or not). The data from a controlled laboratory experiment show that about one third of experimental subjects reveal a concave discount function and another one third of subjects reveal a convex discount function (for delays up to two month).