Violations of Present-value Maximization in Income Choice

Gary Gigliotti () and Barry Sopher
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Gary Gigliotti: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: We report results of an experiment testing for present-value maximization in intertemporal income choice. Two-thirds of subjects did not maximize present value. Through a series of experimental manipulations that impose costs on non-present value maximizers, we are able to reduce the level of violations substantially. We find, however, that a sizebable proportion of subjects continue to systematically violate present value principles. Our interpretation is that these subjects either cannot or chose not to distinguish between income and expenditure in making their choices. Self-management, bounded rationality, and sequence preference are suggested as possible explanations for such behavior.

Keywords: bounded rationality; intertemporal choice; present value; self management; sequence preference (search for similar items in EconPapers)
JEL-codes: C91 D91 (search for similar items in EconPapers)
Date: 1996-11-06
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Citations: View citations in EconPapers (8)

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Journal Article: Violations of Present-Value Maximization in Income Choice (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:199624

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