Hendrik-Sebastian Schmitz Time Inconsistency and Financial Decision Making. Theory and Evidence

Master's Thesis from the year 2012 in the subject Economics - Other, grade: 1,3, University of Münster (Institut für Siedlungs- und Wohnungswesen), language: English, abstract: Behavioral economics is a relatively young subdiscipline of economics that has garnered a noticeable amount of attention especially over the last two decades. It seeks to utilize findings from other scientific fields, especially psychology, in order to enhance the plausibility of neo-classical (mainstream) economic models without replacing or abandoning them . The inclusion of psychology into economic thinking is nothing new, however. Instead, it can be traced back to the period of the classical economists of the 18th century. While lacking the rigorous formal approach of today´s behavioral economists, the conception of the human nature and human decision making was surprisingly sophisticated at the time. For instance, time-inconsistent preferences, which are an important aspect of behavioral economics, have already been examined by David Hume and Adam Smith . Other phenomena, including loss aversion and overconfidence, have also been discussed by classical economists.This thesis has the following structure: Chapter 2 explains a general, quite powerful model of dynamically inconsistent preferences. Special emphasis is placed on real-life examples as well as welfare analysis, including political implications. As we move along, we will constantly compare our findings to the results we would obtain fr...