Discounting Behaviour and the Magnitude Effect: Evidence from a Field Experiment in Denmark

28 Pages Posted: 30 Sep 2013

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Morten I. Lau

Durham Business School

E. Elisabet Rutström

Georgia State University

Date Written: October 2013

Abstract

We evaluate the claim that individuals exhibit a magnitude effect in their discounting behaviour, where higher discount rates are inferred from choices made with lower principals, all else being equal. If the magnitude effect is quantitatively significant, it is not appropriate to use one discount rate that is independent of the scale of the project for cost–benefit analysis and capital budgeting. Using data from a field experiment in Denmark, we find statistically significant evidence of a magnitude effect that is much smaller than is claimed. This evidence surfaces only if one controls for unobserved individual heterogeneity in the population.

Suggested Citation

Andersen, Steffen and Harrison, Glenn William and Lau, Morten Igel and Rutström, E. Elisabet, Discounting Behaviour and the Magnitude Effect: Evidence from a Field Experiment in Denmark (October 2013). Economica, Vol. 80, Issue 320, pp. 670-697, 2013, Available at SSRN: https://ssrn.com/abstract=2332919 or http://dx.doi.org/10.1111/ecca.12028

Steffen Andersen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Glenn William Harrison

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
407-489-3088 (Phone)
253-830-7636 (Fax)

HOME PAGE: http://www.cear.gsu.edu/

Morten Igel Lau

Durham Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

E. Elisabet Rutström

Georgia State University

35 Broad Street
Atlanta, GA 30303-3083
United States

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