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Long-Range Financial Decision-Making: The Role of Episodic Prospection

In: Bank Funding, Financial Instruments and Decision-Making in the Banking Industry

Author

Listed:
  • Gianni Brighetti

    (University of Bologna)

  • Caterina Lucarelli

    (Università Politecnica delle Marche)

  • Nicoletta Marinelli

    (University of Macerata)

  • Giulia Giansiracusa

    (University of Bologna)

Abstract

Individuals often show time-inconsistent preferences when making intertemporal choices for monetary rewards. Time-inconsistent preferences generally emerge when observing the devaluation of outcomes over time (temporal discounting) that do not follow an exponential discounting function, but rather hyperbolic discounting. In this paper, we argue that temporal discounting is sensitive to the type of prospection involved. Given that episodic prospection (when individuals can vividly envisage possible future events) increases the subjective importance of a future reward, we investigate if and how it can effectively attenuate human biases of temporal discounting. Our findings suggest that episodic prospection might attenuate intertemporal choice inefficiencies, when in the form of hyperbolic discounting. This was found to be particularly true if the solicited scenario referred to a primary need (a first priority).

Suggested Citation

  • Gianni Brighetti & Caterina Lucarelli & Nicoletta Marinelli & Giulia Giansiracusa, 2016. "Long-Range Financial Decision-Making: The Role of Episodic Prospection," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Santiago Carbó Valverde & Pedro Jesús Cuadros Solas & Francisco Rodríguez Fernández (ed.), Bank Funding, Financial Instruments and Decision-Making in the Banking Industry, chapter 10, pages 253-277, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-30701-5_10
    DOI: 10.1007/978-3-319-30701-5_10
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