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Are decision errors explaining hyperbolic discounting and non-linear probability weighting?

Author

Listed:
  • Holden, Stein T.

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

  • Tione, Sarah

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

  • Tilahun, Mesfin

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

  • Katengeza, Samson

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

Abstract

We study risky inter-temporal choice in a large random student sample (n=721) and a large rural sample (n=835) in Malawi. All respondents were exposed to the same 20 Multiple Choice Lists with a rapid elicitation method that facilitated the identification of near-future Certainty Equivalents of future risky prospects placed 6, 12, and 24 months into the future. The probabilities of winning in the risky future prospects varied and facilitated the estimation of probability weighting functions for the risky prospects placed 6 and 12 months into the future. The experiment is used to test whether decision errors can explain or be highly correlated with hyperbolic discounting and non-linear (inverse-S-shaped) probability weighting. We find evidence that decision errors are strongly correlated with hyperbolic discounting but do not find that decision errors are correlated with the strong inverse-S-shaped probability weighting (w(p)) patterns in our two samples. We find stronger S-shaped and more pessimistic w(p) functions for 6-month horizon risky prospects than for 12-month horizon risky prospects in both samples. Both patience and optimism bias contribute to subjects taking higher risks related to more risky distant future prospects. This can lead to the postponement of climate action.

Suggested Citation

  • Holden, Stein T. & Tione, Sarah & Tilahun, Mesfin & Katengeza, Samson, 2024. "Are decision errors explaining hyperbolic discounting and non-linear probability weighting?," CLTS Working Papers 3/24, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    • Handle: RePEc:hhs:nlsclt:2024_003
    as

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    References listed on IDEAS

    as
    1. Gary Charness & Catherine Eckel & Uri Gneezy & Agne Kajackaite, 2018. "Complexity in risk elicitation may affect the conclusions: A demonstration using gender differences," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 1-17, February.
    2. Mohammed Abdellaoui & Enrico Diecidue & Emmanuel Kemel & Ayse Onculer, 2022. "Temporal Risk: Utility vs. Probability Weighting," Management Science, INFORMS, vol. 68(7), pages 5162-5186, July.
    3. Cary Frydman & Lawrence J Jin, 2022. "Efficient Coding and Risky Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 161-213.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Decision errors; discounting; risky inter-temporal choice; probability weighting; Malawi;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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