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How good is the Exponential Function discounting Formula? An Experimental Study

Author

Listed:
  • Uri Benzion

    (The Technion-Israel Institute of Technology and Department of Economics, Ben-Gurion University)

  • Yochanan Shachmurove

    (Department of Economics, University of Pennsylvania and City College of the City University of New York)

  • Joseph Yagil

    (The Graduate School of Business, Haifa University and Columbia University)

Abstract

This paper estimates the degree of the exponential-function misvaluation, its variation with given product price level, and its expected growth rate. The paper examines whether other mathematical functions, such as linear, quadratic and cubic functions, conform to the discounting and compounding processes of individual decision makers. Using subjects familiar with the exponential function discounting formula, this study finds that individuals undervalue the compound interest discounting formula given by the exponential function and overvalue the simple interest discounting formula given by the linear function. These findings can be attributed to the overreaction, overconfidence, mental accounting and narrow-framing behaviors discussed in psychology.

Suggested Citation

  • Uri Benzion & Yochanan Shachmurove & Joseph Yagil, 2003. "How good is the Exponential Function discounting Formula? An Experimental Study," PIER Working Paper Archive 03-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:03-015
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    References listed on IDEAS

    as
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    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G00 - Financial Economics - - General - - - General

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