Discounting behavior and the magnitude effect

Andersen, Steffen; Harrison, Glenn; Lau, Morten; Rutstroem, Elisabet

Discounting behavior and the magnitude effect

Andersen, Steffen; Harrison, Glenn; Lau, Morten; Rutstroem, Elisabet

Authors

Steffen Andersen

Glenn Harrison

Professor Morten Lau m.i.lau@durham.ac.uk
Professor

Elisabet Rutstroem

Abstract

We evaluate the claim that individuals exhibit a magnitude effect in their discounting behavior,which is said to occur when higher discount rates are inferred from choices made with lowerprincipals, all else being equal. If the effect is robust, as claimed, we should be able to see it usingprocedures that are more familiar to economists. Using data collected from a representative sampleof adult Danes, we find statistically significant evidence of a small magnitude effect, at levels that are much smaller than is typically claimed. This evidence only surfaces if one carefully controls forunobserved individual heterogeneity in the population. And it disappears completely if we includediscounting choices in which both options have some time delay.

Citation

Andersen, S., Harrison, G., Lau, M., & Rutstroem, E. (2011). Discounting behavior and the magnitude effect

Publication Date	May 1, 2011
Deposit Date	Dec 7, 2012
Publicly Available Date	Dec 7, 2012
Series Title	Durham University Business School Economics Finance Accounting Working Papers
Public URL	https://durham-repository.worktribe.com/output/1699631
Publisher URL	http://www.dur.ac.uk/business/faculty/working-papers/