Choosing Monetary Sequences: Theory and Experimental Evidence

IZA Discussion Paper No. 2129

CEEL Working Paper Series

57 Pages Posted: 13 Mar 2006

See all articles by Paola Manzini

Paola Manzini

University of St. Andrews - School of Economics and Finance; Institute for the Study of Labor (IZA)

Marco Mariotti

University of London - School of Economics and Finance

Luigi Mittone

University of Trento - Department of Economics and Management

Date Written: April 2006

Abstract

In this paper we formulate and investigate experimentally a model of how individuals choose between sequences of monetary outcomes spread out in time. The theoretical model assumes that a decision-maker uses, in a sequential way, two criteria to screen options. Each criterion only permits a decision between some pairs of options, while the other options are incomparable according to that criterion When the first criterion is not decisive, the decision maker resorts to the second criterion to select an alternative. This type of decision procedures has encountered the favour of several psychologists, though it is quite under-explored in the economics domain. We find that: 1) traditional economic models based on discounting alone cannot explain a significant (almost 30%) proportion of the data no matter how much variability in discount functions is allowed; 2) our model, despite considering only a specific (exponential) form of discounting, can explain the data much better solely thanks to the use of the secondary criterion; 3) our model explains certain specific patterns in the choices of the 'irrational' people: we can reject the hypothesis that anomalous behaviour is due simply to random 'mistakes' around the basic predictions of discounting theories: the deviations are not random and there are clear systematic patterns of association between 'irrational' choices.

Keywords: time preference, time sequences, negative discounting

JEL Classification: D9, C91

Suggested Citation

Manzini, Paola and Mariotti, Marco and Mittone, Luigi, Choosing Monetary Sequences: Theory and Experimental Evidence (April 2006). IZA Discussion Paper No. 2129; CEEL Working Paper Series. Available at SSRN: https://ssrn.com/abstract=890203

Paola Manzini

University of St. Andrews - School of Economics and Finance ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

HOME PAGE: http://www.st-andrews.ac.uk/~pm210/

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Marco Mariotti (Contact Author)

University of London - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom

Luigi Mittone

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

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