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 InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199624.
Date of creation: 06 Nov 1996
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bounded rationality; intertemporal choice; present value; self management; sequence preference;
Other versions of this item:
- Gary Gigliotti & Barry Sopher, 1997. "Violations of Present-Value Maximization in Income Choice," Theory and Decision, Springer, vol. 43(1), pages 45-69, July.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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