The Psychology of Intertemporal Tradeoffs

72 Pages Posted: 7 Aug 2009 Last revised: 23 Feb 2010

See all articles by Marc Scholten

Marc Scholten

Instituto Superior de Psicologia Aplicada

Daniel Read

University of Warwick - Warwick Business School

Date Written: August 4, 2009

Abstract

It is commonly assumed that people make intertemporal choices by ‘discounting’ the value of delayed outcomes, assigning discounted values independently to all options, and comparing the discounted values. We identify a class of anomalies to such alternative-based discounting, which collectively show that options are not treated independently but rather comparatively: The time difference, or interval, between the options sometimes counts more and sometimes counts less as a whole than if it were divided into shorter subintervals (superadditivity and subadditivity, respectively), and whether the interval counts more or less depends on the money difference, or compensation, involved (inseparability). We develop a model that replaces alternative-based discounting with attribute-based tradeoffs. In our model, people make intertemporal choices by weighing how much more they will receive or pay if they wait longer against how much longer the wait will be, or, conversely, how much less they will receive or pay if they do not wait longer against how much shorter the wait will be. This model, called the tradeoff model, accommodates, in a psychologically plausible way, all anomalies that the discounting approach can and cannot address.

Suggested Citation

Scholten, Marc and Read, Daniel, The Psychology of Intertemporal Tradeoffs (August 4, 2009). Available at SSRN: https://ssrn.com/abstract=1444094 or http://dx.doi.org/10.2139/ssrn.1444094

Marc Scholten

Instituto Superior de Psicologia Aplicada ( email )

34 Rua Jardim do Tabaco
Lisboa, 1149-041
Portugal

Daniel Read (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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