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Time preference
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== Asymmetries in time preference and preference reversals == Despite the equations meant to describe behavior, when measuring preferences over real world decisions, it was noted that there were some inconsistencies. People’s preferences would change based on the framing of the question or the exact decision being made; one discount rate was hard to find. The main findings are as follows “(1) gains are discounted more than losses; (2) small amounts are discounted more than large amounts; (3) greater discounting is shown to avoid delay of a good than to expedite its receipt; (4) in choices over sequences of outcomes, improving sequences are often preferred to declining sequences though positive time preference dictates the opposite; and (5) in choices over sequences, violations of independence are pervasive, and people seem to prefer spreading consumption over time in a way that diminishing marginal utility alone cannot explain”.<ref name=":0" /> === Sign and magnitude effects === Work by Richard Thaler found the first two main effects.<ref>{{Cite journal |last=Thaler |first=Richard |date=1981-01-01 |title=Some empirical evidence on dynamic inconsistency |url=https://www.sciencedirect.com/science/article/abs/pii/0165176581900677 |journal=Economics Letters |volume=8 |issue=3 |pages=201–207 |doi=10.1016/0165-1765(81)90067-7 |issn=0165-1765|url-access=subscription }}</ref> To measure gains and losses, he asked about the same numerical earnings or debts framed as winnings from a bank lottery or a traffic ticket. He found that gains are discounted more than losses, meaning that, they valued earning money sooner than delaying debts. He also found the discount rate to be higher when asking about tradeoffs between large amounts of money versus small amounts of money, even though the rate of substitution was the same. Some current work explains the psychological underpinnings of these findings. One suggestion is the idea of contemplation emotion, or the feeling of waiting for an event to occur. The idea is that one wants a positive event to occur and does not want to wait for it; on the other hand, people may not mind to delay a negative outcome such as a monetary loss.<ref>{{Cite journal |last1=Molouki |first1=Sarah |last2=Hardisty |first2=David J. |last3=Caruso |first3=Eugene M. |date=December 2019 |title=The Sign Effect in Past and Future Discounting |url=https://journals.sagepub.com/doi/10.1177/0956797619876982 |journal=Psychological Science |language=en |volume=30 |issue=12 |pages=1674–1695 |doi=10.1177/0956797619876982 |pmid=31674883 |issn=0956-7976|url-access=subscription }}</ref> This can help explain the sign effect. === Temptation === Classic economic theory says that more options does not decrease utility. If you are given a completely useless option, it does not hurt you, because you can simply decide not to take it, and your information only increases. However, dynamic inconsistencies can be explained by rational beliefs and temptation. Essentially, there is a psychological cost to resisting the temptation of an activity, so you restrict your future choice set to not include the tempting activity for your long term benefit. Such theories explain why people pay in advance for commitment devices. For example, a person has to choose what to do in the future: nap or go to the gym. They may choose to form some sort of commitment device to go to the gym. Economic theory would argue that the person would be better off leaving the option to nap open, if there is no cost. However, theories of temptation argue that removing the option to nap removed the cost of rejecting the temptation to nap.<ref>{{Citation |last1=Ericson |first1=Keith Marzilli |title=Intertemporal Choice |date=December 2018 |type=Working Paper |url=https://www.nber.org/papers/w25358 |access-date=2024-11-18 |series=Working Paper Series |doi=10.3386/w25358 |last2=Laibson |first2=David}}</ref> === Sub additive discounting === Sub additive discounting is an example of sub additive preferences, meaning that when a problem is broken down into its individual components, people assign greater weights to the components than they would to the whole. In the context of time preference, it is argued that as the interval of time is broken down into smaller and smaller partitions, discounting increases. Daniel Read found evidence of this wherein discounting was much lower when the time interval was divided into three separate parts.<ref>{{Cite journal |last=Read |first=Daniel |date=2001-07-01 |title=Is Time-Discounting Hyperbolic or Subadditive? |url=https://link.springer.com/article/10.1023/A:1011198414683 |journal=Journal of Risk and Uncertainty |language=en |volume=23 |issue=1 |pages=5–32 |doi=10.1023/A:1011198414683 |issn=1573-0476|url-access=subscription }}</ref> He argues that this responsible for the hyperbolic appearance of discount preferences. === Experimental elicitation methods === There have been many attempts to measure a discount rate using experimental methods. Yet, there is still no consensus on the rate. This may be due to the varying elicitation methods for the studies themselves. Put another way, how a study asks questions to uncover the discount rate can influence the result itself. The first experiments to measure discount rates were called MEL (money earlier or later) experiments, wherein participants were asked about their preferences between receiving a certain some of money now and a different sum of money later. Yet, measures of time preferences and inter-temporal tradeoffs came before this. One of the most famous examples is that of the marshmallow experiment. In this Mischel and Ebbesen told kids that they could have one marshmallow now, or, if they waited until the experimenter left and returned, they could have two.<ref>{{Cite journal |last1=Mischel |first1=Walter |last2=Ebbesen |first2=Ebbe B. |date=October 1970 |title=Attention in delay of gratification. |journal=Journal of Personality and Social Psychology |language=en |volume=16 |issue=2 |pages=329–337 |doi=10.1037/h0029815 |s2cid=53464175 |issn=1939-1315}}</ref> The most common way to measure discount rates is as follows. Offered a choice of $100 today and $100 in one month, individuals will most likely choose the $100 now. However, should the question change to having $100 today, or $1,000 in one month, individuals will most likely choose the $1,000 in one month. The $100 can be conceptualized as a Smaller Sooner Reward (SSR), and the $1,000 can be conceptualized as a Larger Later Reward (LLR). Researchers who study temporal discounting are interested in the point in time in which an individual changes their preference for the SSR to the LLR, or vice versa. For example, although an individual may prefer $1,000 in one month over $100 now, they may switch their preference to the $100 if the delay to the $1,000 is increased to 60 months (5 years). This means that this person values $1,000, after a delay of 60 months, less than $100 now. The key is to find the point in time in which the individual values the LLR and the SSR as being equivalent. That is known as the ''indifference point''.<ref name="Odum2011" /> Preferences can be measured by asking people to make a series of choices between immediate and delayed payoffs, where the delay period and the payoff amounts are varied. === Revealed preferences methods === Another stream of research focuses on estimating the discount rate from data on real world choices. Many economic models have looked at different financial puzzles and decisions to estimate a discount rate. Some types of data include asset purchases and pricing, high frequency consumption data, or social security payments.<ref>{{Cite journal |last1=Cohen |first1=Jonathan |last2=Ericson |first2=Keith Marzilli |last3=Laibson |first3=David |last4=White |first4=John Myles |date=June 2020 |title=Measuring Time Preferences |journal=Journal of Economic Literature |language=en |volume=58 |issue=2 |pages=299–347 |doi=10.1257/jel.20191074 |issn=0022-0515 |pmc=10489299 |pmid=37691693}}</ref> All of these situations involve financial decisions between the present and future. Therefore, one can fit an economic model to the situation, and then estimate the discount parameter. As another example, one can infer the environmental discount rate from something like air conditioner purchases. This is because, investing in an energy efficient air conditioner saves both money and energy in the long run but requires more money upfront. This setup establishes a tradeoff between current value (money now) vs future value (savings later). One paper analyzed a survey of air conditioner purchases using a hedonic pricing method.<ref>{{Cite journal |last=Hamamoto |first=Mitsutsugu |date=2023-06-16 |title=Estimating consumers' discount rates in energy-saving investment decisions: a comparison of revealed and stated approaches |url=https://link.springer.com/article/10.1007/s43546-023-00504-6 |journal=SN Business & Economics |language=en |volume=3 |issue=7 |pages=120 |doi=10.1007/s43546-023-00504-6 |issn=2662-9399|url-access=subscription }}</ref> Essentially, “the price of a good is specified as a function of a set of its attributes,” and they find that the discount rate is 13.6%.
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