Articlegold2012

Normative arguments from experts and peers reduce delay discounting

Nicole Senecal · Teresa Wang · Joseph W. Kable

51 citations0/0 files storedJudgment and Decision Making

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Decision-Making and Behavioral Economics Financial Literacy, Pension, Retirement Analysis Experimental Behavioral Economics Studies

Abstract

When making decisions that involve tradeoffs between the quality and timing of desirable outcomes, people consistently discount the value of future outcomes. A puzzling finding regarding such decisions is the extremely high rate at which people discount future monetary outcomes. Most economists would argue that decision-makers should only turn down rates of return that are lower than those available to them elsewhere. Yet the vast majority of studies find discount rates that are significantly higher than market interest rates (Frederick et al., 2002). Here we ask whether a lack of knowledge about the normative strategy can explain high discount rates. In an initial experiment, we find that nearly half of subjects do not spontaneously cite elements of the normative strategy when asked how people should make intertemporal monetary decisions. In two follow-up experiments, we find that after subjects read a "financial guide" detailing the normative strategy, discount rates declined by up to 85%, but were still higher than market interest rates. This decline persisted, though attenuated, for at least one month. In a final experiment, we find that peer-generated advice influences discount rates in a similar manner to "expert" advice, and that arguments focusing on normative considerations are at least as effective as others. These studies show that part of the explanation for high discount rates is a lack of knowledge regarding the normative strategy, and quantify how much discount rates are reduced in response to normative arguments. Given the high level of discounting that remains, however, there are other contributing factors to high discount rates that remain to be quantified.

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References

2002Time Discounting and Time Preference: A Critical Review 2003Temporal construal.1981Some empirical evidence on dynamic inconsistency 1999Heroin addicts have higher discount rates for delayed rewards than non-drug-using controls.2007Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education 2001Toward a behavioral economic understanding of drug dependence: delay discounting processes 2004Blackwell Handbook of Judgment and Decision Making 1997Impulsive and self-control choices in opioid-dependent patients and non-drug-using control patients: Drug and monetary rewards.

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