A Model Integrating Ambiguity and Time Preferences

Many real-world decisions are made in the face of outcomes that are both uncertain and delayed. However, the analysis of time and uncertainty preferences has generally been treated as two separate lines of research. The principal objective of this paper is to provide a descriptive model in which both dimensions are fully integrated. Relying on the framework suggested by Einhorn and Hogarth(1986), we develop a model integrating uncertainty and delay in cases where probability and delay are unknown-i.e., an ambiguous situation. The initial estimate of the probability provides the anchor, which is then adjusted on the basis of the degree of perceived ambiguity in the situation and the individual's attitude toward ambiguity. Our analysis demonstrates that the effect of the anchor probability is diminished as a delay increases or ambiguity increases. Also, we argue that the adjustment is affected by the degrees of wishful thinking. Wishful thinking is a phenomenon in which individuals systematically overestimate the probability that good things will happen to them. In the model, we suggest that wishful thinking is closely related to attitudes toward ambiguity, which refers to the relative weighting of probabilities, and the effects of wishful thinking on the judged increase in probability with increased delay. The proposed model provides a variety of implications and helps to form a framework for future experimental studies.