How good is the Exponential Function discounting Formula? An Experimental Study

Uri Benzion (), Yochanan Shachmurove and Joseph Yagil ()
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Uri Benzion: The Technion-Israel Institute of Technology and Department of Economics, Ben-Gurion University
Joseph Yagil: The Graduate School of Business, Haifa University and Columbia University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper estimates the degree of the exponential-function misvaluation, its variation with given product price level, and its expected growth rate. The paper examines whether other mathematical functions, such as linear, quadratic and cubic functions, conform to the discounting and compounding processes of individual decision makers. Using subjects familiar with the exponential function discounting formula, this study finds that individuals undervalue the compound interest discounting formula given by the exponential function and overvalue the simple interest discounting formula given by the linear function. These findings can be attributed to the overreaction, overconfidence, mental accounting and narrow-framing behaviors discussed in psychology.

Keywords: Exponential Discount Function; Experimental Subjective Discount Rates; Linear, Quadratic and Cubic Functions; overreaction, overconfidence, mental accounting and narrow-framing behavior; Economic Psychology. (search for similar items in EconPapers)
JEL-codes: D90 G00 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2003-06-01
New Economics Papers: this item is included in nep-exp
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