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Choosing Monetary Sequences: Theory and Experimental Evidence

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Author Info

  • Manzini, Paola

    ()
    (University of St. Andrews)

  • Mariotti, Marco

    ()
    (University of St. Andrews)

  • Mittone, Luigi

    ()
    (University of Trento)

Abstract

In this paper we formulate and investigate experimentally a model of how individuals choose between time sequences of monetary outcomes. The theoretical model assumes that a decision-maker uses, sequentially, two criteria to screen options. Each criterion only permits a decision between some pairs of options, while the other options are incomparable according to that criterion. When the first criterion is not decisive, the decision maker resorts to the second criterion to select an alternative. This type of decision procedures has encountered the favour of several psychologists, though it is quite under-explored in the economics domain. In the experiment we find that: 1) traditional economic models based on discounting alone cannot explain a significant (almost 30%) proportion of the data no matter how much variability in the discount functions is allowed; 2) our model, despite considering only a specific (exponential) form of discounting, can explain the data much better solely thanks to the use of the secondary criterion; 3) our model explains certain specific patterns in the choices of the ‘irrational’ people. We can safely reject the hypothesis that anomalous behaviour is due simply to random ‘mistakes’ around the basic predictions of discounting theories: the deviations are not random and there are clear systematic patterns of association between ‘irrational’ choices.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2129.

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Length: 57 pages
Date of creation: May 2006
Date of revision:
Publication status: published in: Theory and Decision, 2010, 65 (3), 327-354
Handle: RePEc:iza:izadps:dp2129

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Keywords: negative discounting; time sequences; time preference;

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References

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  1. Read, Daniel, 2001. " Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
  2. Paola Manzini & Marco Mariotti, 2006. "Two-stage Boundedly Rational Choice Procedures: Theory and Experimental Evidence," Working Papers 561, Queen Mary, University of London, School of Economics and Finance.
  3. Selten,Reinhard, . "Properties of a measure of predictive succes," Discussion Paper Serie B 130, University of Bonn, Germany.
  4. Guyse, Jeffery L. & Keller, L. Robin & Eppel, Thomas, 2002. "Valuing Environmental Outcomes: Preferences for Constant or Improving Sequences," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 87(2), pages 253-277, March.
  5. Ariel Rubinstein, 2003. ""Economics and Psychology"? The Case of Hyperbolic Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1207-1216, November.
  6. Manzini, Paola & Mariotti, Marco, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute for the Study of Labor (IZA).
  7. Manzini, Paola & Mariotti, Marco, 2004. "A Vague Theory of Choice over Time," IZA Discussion Papers 1228, Institute for the Study of Labor (IZA).
  8. Rubinstein, A., 2000. "Is it "Economics and Psychology"?: the Case of Hyperbolic Discounting," Papers 00-21, Tel Aviv.
  9. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer, vol. 2(2), pages 107-127, December.
  10. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-52, May.
  11. Mohammed Abdellaoui & ArthurE. Attema & Han Bleichrodt, 2010. "Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(545), pages 845-866, 06.
  12. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
  13. Gary Gigliotti & Barry Sopher, 1997. "Violations of Present-Value Maximization in Income Choice," Theory and Decision, Springer, vol. 43(1), pages 45-69, July.
  14. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, Econometric Society, vol. 76(3), pages 583-618, 05.
  15. Paola Manzini & Marco Mariotti, 2007. "Sequentially Rationalizable Choice," American Economic Review, American Economic Association, vol. 97(5), pages 1824-1839, December.
  16. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 9(1), pages 67-84, January.
  17. 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.
  18. Rubinstein, Ariel, 2001. "A theorist's view of experiments," European Economic Review, Elsevier, vol. 45(4-6), pages 615-628, May.
  19. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 573-97, May.
  20. Chapman, Gretchen B., 1996. "Expectations and Preferences for Sequences of Health and Money," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 67(1), pages 59-75, July.
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Citations

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Cited by:
  1. Paola Manzini & Marco Mariotti, 2006. "Two-stage Boundedly Rational Choice Procedures: Theory and Experimental Evidence," Working Papers 561, Queen Mary, University of London, School of Economics and Finance.
  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, 2007. "Choice over Time," Working Papers 605, Queen Mary, University of London, School of Economics and Finance.
  4. Attema, Arthur E. & Brouwer, Werner B.F., 2012. "A test of independence of discounting from quality of life," Journal of Health Economics, Elsevier, vol. 31(1), pages 22-34.
  5. 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.
  6. Paola Manzini & Marco Mariotti, 2014. "A Case of Framing Effects: The Elicitation of Time Preferences," Discussion Paper Series, Department of Economics 201405, Department of Economics, University of St. Andrews.

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