Discount Rates Inferred from Decisions: An Experimental Study

Uri Benzion, Amnon Rapoport and Joseph Yagil
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Uri Benzion: Technion---Israel Institute of Technology, Haifa, Israel and Baruch College, City University of New York, New York, New York 10010
Joseph Yagil: University of Haifa, Haifa, Israel and New York University, New York, New York 10006

Management Science, 1989, vol. 35, issue 3, 270-284

Abstract: Two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 \times 4 \times 4 factorial design: scenario (postponing a receipt, postponing a payment, expediting a receipt, expediting a payment), time delay (0.5, 1, 2, and 4 years), and size of cashflow ($40, $200, $1000, and $5000). Individual discount rates were inferred from the responses, and then used to test competitively four hypotheses regarding the behavior of discount rates. The classical hypothesis asserting that the discount rate is uniform across scenarios, time delays, and sums of cashflow was flatly rejected. A market segmentation approach was found lacking. The results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value, and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position.

Keywords: intertemporal decisions; time preference; discount rates (search for similar items in EconPapers)
Date: 1989
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Citations: View citations in EconPapers (331)

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