Conventional or reverse magnitude effect for negative outcomes: A matter of framing

Wolfgang Breuer, Can K. Soypak and Bertram I. Steininger

Review of Financial Economics, 2024, vol. 42, issue 2, 109-123

Abstract: We present and expand existing theories about why individuals may assess positive outcomes differently from negative outcomes in intertemporal choices. All of our theories—based on utility or cost considerations – predict a conventional magnitude effect for positive outcomes, that is, a negative relation between outcome size and subjective discount rates. For negative outcomes, however, implications are different for utility‐ and cost‐based approaches. We argue that the relevance of utility‐based aspects is strengthened in a money frame, leading to a conventional magnitude effect even for negative outcomes, whereas cost‐based considerations gain in importance in an interest rate frame, implying, in contrast, a “reverse” magnitude effect, that is, higher discount rates for (absolutely) higher outcome size. A web‐based experiment with 676 participants confirms our theoretical findings: the conventional magnitude effect prevails for positive outcomes in the money and the interest rate frame and negative outcomes in the money frame. However, there is a reverse magnitude effect for negative outcomes in the interest rate frame. Our results might help to better understand prevailing magnitude effects in practical applications and might also be apt to derive suggestions for better designing of intertemporal decision problems.

Date: 2024
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https://doi.org/10.1002/rfe.1190

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:42:y:2024:i:2:p:109-123

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