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Violations of Present-Value Maximization in Income Choice

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  • GARY GIGLIOTTI
  • BARRY SOPHER

Abstract

We 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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File URL: http://hdl.handle.net/10.1023/A:1004950613488
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Bibliographic Info

Article provided by Springer in its journal Theory and Decision.

Volume (Year): 43 (1997)
Issue (Month): 1 (July)
Pages: 45-69

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Handle: RePEc:kap:theord:v:43:y:1997:i:1:p:45-69

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Web page: http://www.springerlink.com/link.asp?id=100341

Related research

Keywords: Intertemporal choice; present value; self management; bounded rationality; sequence preference;

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  1. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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Cited by:
  1. Vital Anderhub & Werner Gäuth & Wieland Mäuller & Martin Strobel, 2000. "An Experimental Analysis of Intertemporal Allocation Behavior," Experimental Economics, Springer, vol. 3(2), pages 137-152, October.
  2. Sean Duffy & John Smith, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(1), pages 74-90, January.
  3. Paola Manzini & Marco Mariotti & Luigi Mittone, 2010. "Choosing monetary sequences: theory and experimental evidence," Theory and Decision, Springer, vol. 69(3), pages 327-354, September.
  4. Smith, John, 2009. "Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 684-690, August.
  5. Duxbury, Darren & Summers, Barbara & Hudson, Robert & Keasey, Kevin, 2013. "How people evaluate defined contribution, annuity-based pension arrangements: A behavioral exploration," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 256-269.
  6. Noussair, C.N. & Lei, V., 2002. "An experimental test of an optimal growth model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-378701, Tilburg University.
  7. Paola Manzini & Marco Mariotti, 2007. "Choice over Time," Working Papers 605, Queen Mary, University of London, School of Economics and Finance.
  8. John Smith, 2009. "Imperfect Memory and the Preference for Increasing Payments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 684-700, December.
  9. John Smith, 2007. "Cognitive Dissonance, Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200705, Rutgers University, Department of Economics.

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