Violations of Present-Value Maximization in Income Choice
AbstractWe report results of an experiment testing for present-value maximization in intertemporal income choice. Two-thirds of subjects did not maximize present value. Through a series of experimental manipulations that impose costs on non-present value maximizers, we are able to reduce the level of violations substantially. We find, however, that a sizebable proportion of subjects continue to systematically violate present value principles. Our interpretation is that these subjects either cannot or chose not to distinguish between income and expenditure in making their choices. Self-management, bounded rationality, and sequence preference are suggested as possible explanations for such behavior.
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Bibliographic InfoArticle provided by Springer in its journal Theory and Decision.
Volume (Year): 43 (1997)
Issue (Month): 1 (July)
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Web page: http://www.springerlink.com/link.asp?id=100341
Intertemporal choice; present value; self management; bounded rationality; sequence preference;
Other versions of this item:
- Gary Gigliotti & Barry Sopher, 1996. "Violations of Present-value Maximization in Income Choice," Departmental Working Papers 199624, Rutgers University, Department of Economics.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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