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Discounting Behavior and the Magnitude Effect

  • Steffen Andersen

    ()

    (Copenhagen Business School)

  • Glenn W. Harrison

    ()

    (Robinson College of Business, Georgia State University)

  • Morten Lau

    ()

    (Durham Business School)

  • Elisabet E. Rutstroem

    ()

    (Robinson College of Business, Georgia State University)

We evaluate the claim that individuals exhibit a magnitude effect in their discounting behavior, which is said to occur when higher discount rates are inferred from choices made with lower principals, all else being equal. If the effect is robust, as claimed, we should be able to see it using procedures that are more familiar to economists. Using data collected from a representative sample of adult Danes, we find statistically significant evidence of a small magnitude effect, at levels that are much smaller than is typically claimed. This evidence only surfaces if one carefully controls for unobserved individual heterogeneity in the population. And it disappears completely if we include discounting choices in which both options have some time delay.

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Paper provided by Durham University Business School in its series Working Papers with number 2011_02.

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Date of creation: 01 May 2011
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Handle: RePEc:dur:durham:2011_02
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