Subjective discount functions - an experimental approach

Uri Benzion, Yochanan Shachmurove () and Joseph Yagil

Applied Financial Economics, 2004, vol. 14, issue 5, pages 299-311

Abstract: This study estimates the degree of the exponential-function (EF) misvaluation and its variation with three parameters: time, the product price level and its growth rate, as well as with personal characteristics. The results suggest an undervaluation of the compound discounting formula given by the exponential function and an overvaluation of the simple-interest discounting function. Findings appear in line with the hyperbolic function and perhaps indirectly related to the overconfidence and overreaction phenomena. A possible implication of the study's findings is that at least part of the intertemporal-choice anomalous behaviour documented in the experimental literature of economic psychology can be attributed to misevaluation of the exponential function.

Date: 2004
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