Reflection on risk over time
Also known as: Prospect theory for time, Reference-dependent discounting
Importing prospect theory's reference point and loss aversion into choices over time.
What it means
This approach explains intertemporal anomalies by treating delayed outcomes the way prospect theory treats risky ones — as gains and losses measured against a reference point, with diminishing sensitivity and loss aversion. Loewenstein and Prelec built a descriptive model of intertemporal choice on exactly these foundations, showing that a value function kinked at the reference point reproduces the magnitude effect, the sign effect, and the delay-speedup asymmetry in one framework. The key move is to recognize that whether a future change is coded as a gain or a loss depends on the reference point, which is why the same delay can be valued differently when framed as postponement versus advancement. It thus unifies the two great descriptive theories of decision — under risk and over time — under a shared psychology of reference dependence. The synthesis clarified that many 'discounting anomalies' are really framing and loss-aversion effects in disguise.
Examples
Postponing a bonus feels like a loss while receiving it early feels like a gain, so the two are valued asymmetrically — exactly as a kinked, reference-based value function predicts.
A shopper pays a premium to have a parcel arrive two days sooner but demands a much bigger refund to accept a two-day delay — the same two days, gain or loss.
Offered a year to pay a dental bill at no interest, many settle it now: a looming loss is discounted far less than a delayed gain, so waiting costs more than it saves.
First described in Loewenstein & Prelec (1992).