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Violations of Present-value Maximization in Income Choice

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Author Info
Gary Gigliotti () (Rutgers University)
Barry Sopher () (Rutgers University)

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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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Publisher Info
Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199624.

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Date of creation: 06 Nov 1996
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Handle: RePEc:rut:rutres:199624

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Related research
Keywords: bounded rationality; intertemporal choice; present value; self management; sequence preference;

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Find related papers by JEL classification:
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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  1. Paola Manzini & Marco Mariotti & Luigi Mittone, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," CEEL Working Papers 0601, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
    Other versions:
  2. John Smith, 2007. "Cognitive Dissonance, Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200705, Rutgers University, Department of Economics. [Downloadable!]
  3. Paola Manzini & Marco Mariotti, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
    • Paola Manzini & Marco Mariotti, 2007. "Choice over Time," Working Papers 605, Queen Mary, University of London, Department of Economics. [Downloadable!]
  4. Vivian Lei & Charles N. Noussair, 2002. "An Experimental Test of an Optimal Growth Model," American Economic Review, American Economic Association, vol. 92(3), pages 549-570, June. [Downloadable!]
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  5. 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. [Downloadable!] (restricted)
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