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Normative arguments from experts and peers reduce delay discounting

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  • Nicole Senecal
  • Teresa Wang
  • Elizabeth Thompson
  • Joseph W. Kable
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    Abstract

    When making decisions that involve tradeoffs between the quality and timing of desirable outcomes, people consistently discount the value of future outcomes. A puzzling finding regarding such decisions is the extremely high rate at which people discount future monetary outcomes. Most economists would argue that decision-makers should turn down only rates of return that are lower than those available to them elsewhere. Yet the vast majority of studies find discount rates that are significantly higher than market interest rates (Frederick et al., 2002). Here we ask whether a lack of knowledge about the normative strategy can explain high discount rates. In an initial experiment, nearly half of subjects did not spontaneously cite elements of the normative strategy when asked how people should make intertemporal monetary decisions. In two follow-up experiments, after subjects read a ``financial guide'' detailing the normative strategy, discount rates declined by up to 85%, but were still higher than market interest rates. This decline persisted, though attenuated, for at least one month. In a final experiment, peer-generated advice influenced discount rates in a similar manner to ``expert'' advice, and arguments focusing on normative considerations were at least as effective as others. These studies show that part of the explanation for high discount rates is a lack of knowledge regarding the normative strategy, and they quantify how much discount rates are reduced in response to normative arguments. Given the high level of discounting that remains, however, there are other contributing factors to high discount rates that remain to be quantified.

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    Bibliographic Info

    Article provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.

    Volume (Year): 7 (2012)
    Issue (Month): 5 (September)
    Pages: 568-589

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    Handle: RePEc:jdm:journl:v:7:y:2012:i:5:p:568-589

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    Related research

    Keywords: intertemporal choice; behavioral economics; financial education.;

    References

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    1. Partha Dasgupta & Eric Maskin, 2005. "Uncertainty and Hyperbolic Discounting," American Economic Review, American Economic Association, vol. 95(4), pages 1290-1299, September.
    2. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, INFORMS, vol. 35(3), pages 270-284, March.
    3. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    4. Moore, Michael J. & Viscusi, W. Kip, 1990. "Discounting environmental health risks: New evidence and policy implications," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S51-S62, March.
    5. Horowitz, John K., 1996. "Environmental policy under a non-market discount rate," Ecological Economics, Elsevier, vol. 16(1), pages 73-78, January.
    6. Burks, Stephen V. & Carpenter, Jeffrey P. & Götte, Lorenz & Rustichini, Aldo, 2008. "Cognitive Skills Explain Economic Preferences, Strategic Behavior, and Job Attachment," IZA Discussion Papers 3609, Institute for the Study of Labor (IZA).
    7. Ian Hathaway & Sameer Khatiwada, 2008. "Do financial education programs work?," Working Paper 0803, Federal Reserve Bank of Cleveland.
    8. Halevy, Yoram, 2004. "Strotz meets Allais: Diminishing Impatience and the Certainty Effect," Microeconomics.ca working papers, Vancouver School of Economics halevy-04-10-29-10-08-43, Vancouver School of Economics, revised 25 Feb 2014.
    9. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    10. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer, Springer, vol. 2(2), pages 107-127, December.
    11. Antoine Bommier, 2006. "Uncertain Lifetime And Intertemporal Choice: Risk Aversion As A Rationale For Time Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1223-1246, November.
    12. Gerber, Anke & Rohde, Kirsten I.M., 2010. "Risk and preference reversals in intertemporal choice," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 654-668, December.
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    Cited by:
    1. Nicole M. Giacopelli & Kaila M. Simpson & Reeshad S. Dalal & Kristen L. Randolph & Samantha J. Holland, 2013. "Maximizing as a predictor of job satisfaction and performance: A tale of three scales," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(4), pages 448-469, July.

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