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The Effect of a Short Planning Horizon on Intertemporal Consumption Choices

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  • Enrica Carbone

    ()

  • Gerardo Infante

    ()

Abstract

Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also finding some support (See Carbone (2006)) for descriptive models, such as the Rolling Model. This paper presents an experimental analysis on the effect of a short planning horizon on intertemporal consumption choices. The purpose of the study is to test whether very short horizons are more easily perceived by agents, allowing them to plan optimally. This experiment tests a somewhat implicit assumption of the Rolling Model, or of similar descriptive approaches, namely that people might be able to use the optimal strategy if they are faced with shorter planning horizons. Moreover, this hypothesis is tested in the cases of decision making under certainty, risk and uncertainty, in order to analyze how these environments may affect the perception of the length of the planning horizon. Results suggest that planning periods have a significant effect on deviations from unconditional optimum in all sequences and all treatments. This finding has been interpreted as evidence of participants not using the optimal strategy. When conditional deviations are considered, results are confirmed only in the case of decision making under uncertainty. This second finding has been interpreted as suggesting that uncertainty on income seems to prevent participants from improving their decision making.

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Bibliographic Info

Paper provided by University of Siena in its series Labsi Experimental Economics Laboratory University of Siena with number 043.

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Date of creation: Dec 2012
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Handle: RePEc:usi:labsit:043

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Keywords: Intertemporal Consumer Choice; Life Cycle; Risk; Uncertainty; Laboratory Experiments; Short Planning Horizon.;

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  1. John D Hey & Gianna Lotito & Anna Maffioletti, 2008. "The Descriptive and Predictive Adequacy of Theories of Decision Making Under Uncertainty/Ambiguity," Discussion Papers 08/04, Department of Economics, University of York.
  2. Hey, John D. & Knoll, Julia A., 2011. "Strategies in dynamic decision making - An experimental investigation of the rationality of decision behaviour," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 399-409, June.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. John D. Hey & Massimo Paradiso, 2006. "Preferences Over Temporal Frames In Dynamic Decision Problems: An Experimental Investigation," Manchester School, University of Manchester, vol. 74(2), pages 123-137, 03.
  5. John Hey & Luca Panaccione, 2011. "Dynamic decision making: what do people do?," Journal of Risk and Uncertainty, Springer, vol. 42(2), pages 85-123, April.
  6. George Loewenstein & Richard H Thaler, 2003. "Anomalies: Intertemporal Choice," Levine's Working Paper Archive 618897000000000784, David K. Levine.
  7. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  8. John D Hey & Gianna Lotito & Anna Maffioletti, 2007. "Choquet OK?," Discussion Papers 07/12, Department of Economics, University of York.
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