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Avoiding the curves: Direct elicitation of time preferences

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  • Susan Laury
  • Melayne McInnes
  • J. Todd Swarthout

Abstract

We propose and test a new method for eliciting curvature-controlled discount rates that are invariant to the form of the utility function. The advantage of this method is that individual discount rates can be obtained without knowledge of risk attitude or parametric assumptions about the form of the utility function. We compare our single elicitation method that does not require estimation of the utility function to the Andersen et al. (2008) double elicitation technique in which the utility function and discount rates are jointly estimated. We use a laboratory experiment to perform a within-subjects comparison of discount rates from these two methods and find consistent results, which is reassuring given the wide range of estimates in the literature. In addition, the estimated discount rates in our study are "plausibly low" in contrast to the vast majority of other discount rate studies. Average discount rates are estimated to be between 12.2 and 14.1 percent. Our results are robust to relaxing the expected utility assumption of linearity in the probabilities, as we find little evidence of probability weighting in our data.
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Suggested Citation

  • Susan Laury & Melayne McInnes & J. Todd Swarthout, 2012. "Avoiding the curves: Direct elicitation of time preferences," Journal of Risk and Uncertainty, Springer, vol. 44(3), pages 181-217, June.
    • Handle: RePEc:kap:jrisku:v:44:y:2012:i:3:p:181-217
    DOI: 10.1007/s11166-012-9144-6
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    More about this item

    Keywords

    Discount rate; Intertemporal decision making; Binary lottery procedure; Experiment; D03; D90; C90;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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