Lecture 7: choice and time Flashcards
peak & end rule
we remember the peak and end when remembering what we liked or hated
duration neglect
we don’t remember how long something was when evaluating an event (ice water experiment)
discount rate
if you are rational your willingness to wait should be equal to the future gain. similair to interest.
intertemporal choice
involve trade-offs among outcomes that differ in their timing and often in their quality and quantity as well. we see this in almost all of our choices.
our “wants” bring us more pleasure than “shoulds” at the time, but “shoulds” are better in the long run.
Samuelson
studied rational intemporal choice (smaller sooner en larger later) 100 now or 110 in a year, most people chose 100, but 110 is a 10% interest
- later outcome is outcome from investing the smaller at an experimental interest rate over the interval seperating the outcomes
- consumer compares experimental interest rate with a personal interest rate (= discount rate i)
- therefore people will choose LL over SS only if the experimenter offers a greater interest rate than discount rate
rational model about intertemporal choice
model assumes wealth at the time (t+n) is dicounted exponentially compared with wealth at the time (t)
- this predicts that choices for today versus 1 year in the future look exactly like choices 1 year in the future versus 2 years in the future.
inconsistencies in the rational model about wealth and time
inconsistencies about
- time = delay effect
- amount = magnitude effect
- valence = sign effect
delay effect
time
we have present bias.(now or over a year looks different than over a year or two years) the discounting is not exponential but hyperbolic (steeper), which leads to dynamic inconsistency. to stick to our preferences we use commitment devices.
dynamic inconsistency
you prefer something now, but later you prefer something else
commitment devices
devices to stick to preferences, like waking up early with an alarm clock or getting gastic bypass surgery.
Magnitude effect
amount
we have a higher discount for smaller amounts. you are more likely to wait for 150 euro’s when you would now get 100 euro’s, because you would put the 100 euro’s in a savings acount either way. (mental accounting).
sign effect
valence
higher discount rates for gains than for losses. speeding up versus delaying. direction and sequence effect.
direction effect
higher discount rates for increased delays than decreased delays. people want to be paid more to delay something that they get than they would pay to recieve something immediatly.
sequence effect
increasing sequences are preferred over decreasing sequences. and people want to spread outcomes
pleasure of anticipation
people don’t like the idea something bad is going to happen, but they do like the idea something nice is going to happen.
