Choosing monetary sequences: Theory and experimental evidence

Paola Manzini*, Marco Mariotti, Luigi Mittone

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

17 Citations (Scopus)

Abstract

We formulate and investigate experimentally a model of how individuals choose between time sequences of monetary outcomes. The model assumes that a decision maker uses, sequentially, 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. 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 the 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 reject the hypothesis that anomalous behavior is due simply to random "mistakes" around the basic predictions of discounting theories: deviations are not random and there are clear systematic patterns of association between "irrational" choices.

Original languageEnglish
Pages (from-to)327-354
Number of pages28
JournalTheory and Decision
Volume69
Issue number3
DOIs
Publication statusPublished - Sep 2010

Bibliographical note

Funding Information:
Acknowledgments Part of this study was carried out while Manzini and Mariotti were visiting the University of Trento, and funding for the experiments was provided by the ESRC under grant RES-000-22-0866. We wish to thank both institutions for their support. We are also grateful to the thoughtful comments of two referees and to Alan Agresti, Glenn Harrison, John Hey, Stepana Lazarova, Daniel Read, Bob Sugden, and seminar audiences at the LSE Choice Group, the 2006 FUR Conference and the University of Birmingham for insightful discussions and comments, as well as to the tireless staff of the CEEL lab in Trento, in particular, to Marco Tecilla for superb programming support. All errors are our own.

Funding Information:
The instructions are the same for all you. You are taking part in an experiment to study intertemporal preferences. The project is financed by the ESRC.

Copyright:
Copyright 2010 Elsevier B.V., All rights reserved.

Keywords

  • Negative discounting
  • Time preference
  • Time sequences

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