Understanding intertemporal choices

Previous experimental results show clearly that many subjects do not optimize when solving a life-cycle consumption problem. What do they do? This paper attempts to resolve this question, looking at the discounting, hyperbolic and rolling models as possible explanations. Data from two experiments (one an experiment with a typical subject pool and the second an experiment with subjects from the CentER panel) is used, and the advantage of having experimental data is exploited, which means that one can actually estimate the hyperbolic model. It is shown that the (exponential) discounting model appears to give the best explanation – suggesting that subjects do look ahead (as they should) but increasingly less as time passes (as they should not in the context of these experiments).