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Choosing Monetary Sequences: Theory and Experimental Evidence

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  • Paola Manzini
  • Marco Mariotti
  • Luigi Mittone

Abstract

In this paper we formulate and investigate experimentally a model of how individuals choose between sequences of monetary outcomes spread out in time. The theoretical model assumes that a decision-maker uses, in a sequential way, two criteria to screen options. Each criterion only permits a decision between some pairs of options, while the other options are incomparable according to that criterion When the first criterion is not decisive, the decision maker resorts to the second criterion to select an alternative. This type of decision procedures has encountered the favour of several psychologists, though it is quite under-explored in the economics domain. We find that: 1) traditional economic models based on discounting alone cannot explain a significant (almost 30%) proportion of the data no matter how much variability in discount functions is allowed; 2) our model, despite considering only a specific (exponential) form of discounting, can explain the data much better solely thanks to the use of the secondary criterion; 3) our model explains certain specific patterns in the choices of the 'irrational' people: we can reject the hypothesis that anomalous behaviour is due simply to random 'mistakes' around the basic predictions of discounting theories: the deviations are not random and there are clear systematic patterns of association between 'irrational' choices.

Suggested Citation

  • Paola Manzini & Marco Mariotti & Luigi Mittone, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," CEEL Working Papers 0601, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  • Handle: RePEc:trn:utwpce:0601
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    References listed on IDEAS

    as
    1. Paola Manzini & Marco Mariotti, 2007. "Sequentially Rationalizable Choice," American Economic Review, American Economic Association, vol. 97(5), pages 1824-1839, December.
    2. Paola Manzini & Marco Mariotti, 2006. "Two-stage Boundedly Rational Choice Procedures: Theory and Experimental Evidence," Working Papers 561, Queen Mary University of London, School of Economics and Finance.
    3. Robin Cubitt & Daniel Read, 2007. "Can intertemporal choice experiments elicit time preferences for consumption?," Experimental Economics, Springer;Economic Science Association, vol. 10(4), pages 369-389, December.
    4. Rubinstein, A., 2000. "Is it "Economics and Psychology"?: the Case of Hyperbolic Discounting," Papers 00-21, Tel Aviv.
    5. Manzini, Paola & Mariotti, Marco, 2007. "Choice Over Time," IZA Discussion Papers 2993, Institute of Labor Economics (IZA).
    6. Selten, Reinhard, 1991. "Properties of a measure of predictive success," Mathematical Social Sciences, Elsevier, vol. 21(2), pages 153-167, April.
    7. Manzini Paola & Mariotti Marco, 2006. "A Vague Theory of Choice over Time," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-27, October.
    8. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, May.
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    12. Rubinstein, Ariel, 2001. "A theorist's view of experiments," European Economic Review, Elsevier, vol. 45(4-6), pages 615-628, May.
    13. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    14. Guyse, Jeffery L. & Keller, L. Robin & Eppel, Thomas, 2002. "Valuing Environmental Outcomes: Preferences for Constant or Improving Sequences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 87(2), pages 253-277, March.
    15. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    16. Mohammed Abdellaoui & ArthurE. Attema & Han Bleichrodt, 2010. "Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility," Economic Journal, Royal Economic Society, vol. 120(545), pages 845-866, June.
    17. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer;Economic Science Association, vol. 2(2), pages 107-127, December.
    18. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-352, May.
    19. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, University Library of Munich, Germany, revised 21 Dec 2005.
    20. Read, Daniel, 2001. "Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
    21. Gary Gigliotti & Barry Sopher, 1997. "Violations of Present-Value Maximization in Income Choice," Theory and Decision, Springer, vol. 43(1), pages 45-69, July.
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    Citations

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    Cited by:

    1. Li, Jiangtao & Tang, Rui, 2017. "Every random choice rule is backwards-induction rationalizable," Games and Economic Behavior, Elsevier, vol. 104(C), pages 563-567.
    2. Arthur E. Attema & Han Bleichrodt & Olivier L’Haridon & Patrick Peretti-Watel & Valérie Seror, 2018. "Discounting health and money: New evidence using a more robust method," Journal of Risk and Uncertainty, Springer, vol. 56(2), pages 117-140, April.
    3. Ali al-Nowaihi & Sanjit Dhami, 2018. "Foundations for Intertemporal Choice," CESifo Working Paper Series 6913, CESifo.
    4. Paola Manzini & Marco Mariotti, 2007. "Choice over Time," Working Papers 605, Queen Mary University of London, School of Economics and Finance.
    5. Sean Duffy & John Smith, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(1), pages 74-90, January.
    6. Attema, Arthur E. & Brouwer, Werner B.F., 2012. "A test of independence of discounting from quality of life," Journal of Health Economics, Elsevier, vol. 31(1), pages 22-34.
    7. Duffy, Sean & Smith, John & Woods, Kristin, 2015. "How does the preference for increasing payments depend on the size and source of the payments?," MPRA Paper 64212, University Library of Munich, Germany.
    8. Stephen L. Cheung, 2020. "Eliciting utility curvature in time preference," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 493-525, June.
    9. Thomas Demuynck, 2015. "Statistical inference for measures of predictive success," Theory and Decision, Springer, vol. 79(4), pages 689-699, December.
    10. John Smith, 2009. "Imperfect Memory and the Preference for Increasing Payments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 684-700, December.
    11. Paola Manzini & Marco Mariotti, 2006. "Two-stage Boundedly Rational Choice Procedures: Theory and Experimental Evidence," Working Papers 561, Queen Mary University of London, School of Economics and Finance.
    12. Mohammed Abdellaoui & Han Bleichrodt & Olivier l'Haridon & Corina Paraschiv, 2013. "Is There One Unifying Concept of Utility?An Experimental Comparison of Utility Under Risk and Utility Over Time," Management Science, INFORMS, vol. 59(9), pages 2153-2169, September.
    13. Paola Manzini & Marco Mariotti & Luigi Mittone, 2014. "A Case of Framing Effects: The Elicitation of Time Preferences," Discussion Paper Series, School of Economics and Finance 201405, School of Economics and Finance, University of St Andrews.
    14. Daniel Read & Christopher Y. Olivola & David J. Hardisty, 2017. "The Value of Nothing: Asymmetric Attention to Opportunity Costs Drives Intertemporal Decision Making," Management Science, INFORMS, vol. 63(12), pages 4277-4297, December.
    15. Heydari, Pedram, 2021. "Luce arbitrates: Stochastic resolution of inner conflicts," Games and Economic Behavior, Elsevier, vol. 126(C), pages 33-74.

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    More about this item

    Keywords

    Time preference; Time sequences; Negative discounting;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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