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Discount Rates Inferred from Decisions: An Experimental Study

Listed author(s):
  • Uri Benzion

    (Technion---Israel Institute of Technology, Haifa, Israel and Baruch College, City University of New York, New York, New York 10010)

  • Amnon Rapoport

    (University of Haifa, Haifa, Israel and Department of Psychology, University of North Carolina, Chapel Hill, North Carolina 27514)

  • Joseph Yagil

    (University of Haifa, Haifa, Israel and New York University, New York, New York 10006)

Two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 \times 4 \times 4 factorial design: scenario (postponing a receipt, postponing a payment, expediting a receipt, expediting a payment), time delay (0.5, 1, 2, and 4 years), and size of cashflow ($40, $200, $1000, and $5000). Individual discount rates were inferred from the responses, and then used to test competitively four hypotheses regarding the behavior of discount rates. The classical hypothesis asserting that the discount rate is uniform across scenarios, time delays, and sums of cashflow was flatly rejected. A market segmentation approach was found lacking. The results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value, and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position.

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Article provided by INFORMS in its journal Management Science.

Volume (Year): 35 (1989)
Issue (Month): 3 (March)
Pages: 270-284

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Handle: RePEc:inm:ormnsc:v:35:y:1989:i:3:p:270-284
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