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Discounting Behavior and the Magnitude Effect

Author

Listed:
  • Steffen Andersen

    (Copenhagen Business School)

  • Glenn W. Harrison

    (Robinson College of Business, Georgia State University)

  • Morten Lau

    (Durham Business School)

  • Elisabet E. Rutstroem

    (Robinson College of Business, Georgia State University)

Abstract

We evaluate the claim that individuals exhibit a magnitude effect in their discounting behavior, which is said to occur when higher discount rates are inferred from choices made with lower principals, all else being equal. If the effect is robust, as claimed, we should be able to see it using procedures that are more familiar to economists. Using data collected from a representative sample of adult Danes, we find statistically significant evidence of a small magnitude effect, at levels that are much smaller than is typically claimed. This evidence only surfaces if one carefully controls for unobserved individual heterogeneity in the population. And it disappears completely if we include discounting choices in which both options have some time delay.

Suggested Citation

  • Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Discounting Behavior and the Magnitude Effect," Department of Economics Working Papers 2011_02, Durham University, Department of Economics.
    • Handle: RePEc:dur:durham:2011_02
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    File URL: http://dro.dur.ac.uk/10350
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    References listed on IDEAS

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    1. Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
    2. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-1443, December.
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    Cited by:

    1. Holden, Stein, 2014. "Explaining anomalies in intertemporal choice: A mental zooming theory," CLTS Working Papers 2/14, Norwegian University of Life Sciences, Centre for Land Tenure Studies, revised 10 Oct 2019.
    2. Lydia Lawless & Andreas Drichoutis & Rodolfo Nayga, 2013. "Time preferences and health behaviour: a review," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 1(1), pages 1-19, December.
    3. Chen Sun & Jan Potters, 2022. "Magnitude effect in intertemporal allocation tasks," Experimental Economics, Springer;Economic Science Association, vol. 25(2), pages 593-623, April.
    4. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten I. & Rutström, E. Elisabet, 2014. "Discounting behavior: A reconsideration," European Economic Review, Elsevier, vol. 71(C), pages 15-33.
    5. Ubfal, Diego, 2016. "How general are time preferences? Eliciting good-specific discount rates," Journal of Development Economics, Elsevier, vol. 118(C), pages 150-170.
    6. Andreas C. Drichoutis & Rodolfo M. Nayga, 2015. "Do risk and time preferences have biological roots?," Southern Economic Journal, John Wiley & Sons, vol. 82(1), pages 235-256, July.

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