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Intertemporal tradeoffs priced in interest rates and amounts: a study of method variance

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  • Read, Daniel
  • Airoldi, Mara
  • Loewe, G

Abstract

In intertemporal choice experiments people usually choose between smaller-sooner and larger-later amounts of money. That is, they make tradeoffs in terms of nominal amounts. Yet the factor governing intertemporal tradeoffs in the marketplace is usually the interest rate. In this study, we tested whether two major phenomena that occur when trading off nominal amounts, excessive discounting and the hyperbolic-interval effect, would also occur when trade-offs are made in terms of interest rates. They don’t. In a large-scale (N=1,960) internet study of Spanish consumers who made intertemporal tradeoffs for money, tradeoffs described in terms of nominal amounts induced high discount rates and a considerable hyperbolic-interval effect (replicating earlier studies). However, when they were described as both amounts and interest rates, discount rates were much lower, and there was no effect for how finely the interval was partitioned. When the tradeoffs were described as interest rates only, discount rates were even lower, and the hyperbolic-interval effect was reversed. Thus, some of the most-cited results in intertemporal choice research are unique to a specific way of eliciting discount rates.

Suggested Citation

  • Read, Daniel & Airoldi, Mara & Loewe, G, 2005. "Intertemporal tradeoffs priced in interest rates and amounts: a study of method variance," LSE Research Online Documents on Economics 19823, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19823
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    References listed on IDEAS

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    1. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
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    4. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    5. Read, Daniel, 2001. "Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
    6. Martin Ahlbrecht & Martin Weber, 1997. "An Empirical Study on Intertemporal Decision Making Under Risk," Management Science, INFORMS, vol. 43(6), pages 813-826, June.
    7. George F. Loewenstein, 1988. "Frames of Mind in Intertemporal Choice," Management Science, INFORMS, vol. 34(2), pages 200-214, February.
    8. Robin Cubitt & Chris Starmer & Robert Sugden, 1998. "On the Validity of the Random Lottery Incentive System," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 115-131, September.
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    Cited by:

    1. Li-Wei Chao & Helena Szrek & Nuno Sousa Pereira & Mark V. Pauly, 2009. "Time preference and its relationship with age, health, and survival probability," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 4(1), pages 1-19, February.
    2. Anke Gerbe & Kirsten I.M. Rohde, 2010. "Risk and Preference Reversals in Intertemporal Choice," Post-Print hal-00911832, HAL.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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