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The Effect of a Short Planning Horizon on Intertemporal Consumption Choices

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  • Enrica Carbone

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  • Gerardo Infante

    ()

Abstract

Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also finding some support (See Carbone (2006)) for descriptive models, such as the Rolling Model. This paper presents an experimental analysis on the effect of a short planning horizon on intertemporal consumption choices. The purpose of the study is to test whether very short horizons are more easily perceived by agents, allowing them to plan optimally. This experiment tests a somewhat implicit assumption of the Rolling Model, or of similar descriptive approaches, namely that people might be able to use the optimal strategy if they are faced with shorter planning horizons. Moreover, this hypothesis is tested in the cases of decision making under certainty, risk and uncertainty, in order to analyze how these environments may affect the perception of the length of the planning horizon. Results suggest that planning periods have a significant effect on deviations from unconditional optimum in all sequences and all treatments. This finding has been interpreted as evidence of participants not using the optimal strategy. When conditional deviations are considered, results are confirmed only in the case of decision making under uncertainty. This second finding has been interpreted as suggesting that uncertainty on income seems to prevent participants from improving their decision making.

Suggested Citation

  • Enrica Carbone & Gerardo Infante, 2012. "The Effect of a Short Planning Horizon on Intertemporal Consumption Choices," Labsi Experimental Economics Laboratory University of Siena 043, University of Siena.
  • Handle: RePEc:usi:labsit:043
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    References listed on IDEAS

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    1. T. Ballinger & Eric Hudson & Leonie Karkoviata & Nathaniel Wilcox, 2011. "Saving behavior and cognitive abilities," Experimental Economics, Springer;Economic Science Association, vol. 14(3), pages 349-374, September.
    2. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
    3. Fehr, Ernst & Zych, Peter K, 1998. " Do Addicts Behave Rationally?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 643-662, September.
    4. Alexander L. Brown & Zhikang Eric Chua & Colin F. Camerer, 2009. "Learning and Visceral Temptation in Dynamic Saving Experiments," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 197-231.
    5. Hey, John D. & Knoll, Julia A., 2011. "Strategies in dynamic decision making - An experimental investigation of the rationality of decision behaviour," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 399-409, June.
    6. George Loewenstein & Richard H Thaler, 2003. "Anomalies: Intertemporal Choice," Levine's Working Paper Archive 618897000000000784, David K. Levine.
    7. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    8. John Hey & Gianna Lotito & Anna Maffioletti, 2010. "The descriptive and predictive adequacy of theories of decision making under uncertainty/ambiguity," Journal of Risk and Uncertainty, Springer, vol. 41(2), pages 81-111, October.
    9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    10. John D Hey & Gianna Lotito & Anna Maffioletti, 2007. "Choquet OK?," Discussion Papers 07/12, Department of Economics, University of York.
    11. Enrica Carbone & John D. Hey, 2004. "The effect of unemployment on consumption: an experimental analysis," Economic Journal, Royal Economic Society, vol. 114(497), pages 660-683, July.
    12. John D. Hey & Massimo Paradiso, 2006. "Preferences Over Temporal Frames In Dynamic Decision Problems: An Experimental Investigation," Manchester School, University of Manchester, vol. 74(2), pages 123-137, March.
    13. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    14. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.
    15. John Hey & Luca Panaccione, 2011. "Dynamic decision making: what do people do?," Journal of Risk and Uncertainty, Springer, vol. 42(2), pages 85-123, April.
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    Cited by:

    1. Jim Engle-Warnick & Diego Pulido & Marine de Montaignac, 2016. "Trust, ambiguity, and financial decision-making," CIRANO Working Papers 2016s-44, CIRANO.
    2. Paweł Rokita & Radosław Pietrzyk & Łukasz Feldman, 2014. "Multiobjective Optimization of Financing Household Goals with Multiple Investment Programs," Statistics in Transition new series, Główny Urząd Statystyczny (Polska), vol. 15(2), pages 243-268, March.
    3. Enrica Carbone & Konstantinos Georgalos & Gerardo Infante, 2016. "Individual vs. Group Decision Making: an Experiment on Dynamic Choice under Risk and Ambiguity," Working Papers 138739716, Lancaster University Management School, Economics Department.

    More about this item

    Keywords

    Intertemporal Consumer Choice; Life Cycle; Risk; Uncertainty; Laboratory Experiments; Short Planning Horizon.;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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