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How Important is the Time Value of Money in Decision Making? Results of an Experiment

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  • Victor Dragotă

Abstract

This paper tests how important the time value of money (TVM) principle is in decision making in real-life conditions, when different selection criteria can be considered. A three-stage survey was administered to students from a Romanian university of economics. They were asked to choose between two cars. These cars have equal total cash outflows but different present values. The benefits from using them were not specified, thus inducing a model ambiguity: respondents may consider only cash flows, but they can consider other benefits, too. It was tested whether the answers remain stable when supplementary information is provided. The respondents explained their motivations. Probit regressions were used to explain the preferences for applying or not applying TVM, for switching from one answer to another, and for converging to a response compatible with a preference for TVM. TVM was not the main selection criterion. Financial education had no impact on the opinion.

Suggested Citation

  • Victor Dragotă, 2022. "How Important is the Time Value of Money in Decision Making? Results of an Experiment," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(3-4), pages 259-275.
    • Handle: RePEc:prg:jnlpep:v:2022:y:2022:i:3-4:id:805:p:259-275
    DOI: 10.18267/j.pep.805
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    More about this item

    Keywords

    Time value of money; decision making; utility; model ambiguity;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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