Violations of Present-Value Maximization in Income Choice |
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Authors: | GARY GIGLIOTTI BARRY SOPHER |
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Institution: | (1) Department of Economics, Rutgers University, 116 College Avenue, NJ, 08903, U.S.A |
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Abstract: | We report results of an experiment testing for present-value maximization in intertemporal income choice. Two-thirds of subjects did not maximize present value. Through a series of experimental manipulations that impose costs on non-present value maximizers, we are able to reduce the level of violations substantially. We find, however, that a sizeable proportion of subjects continue to systematically violate present-value principles. Our interpretation is that these subjects either cannot or choose not to distinguish between t income and t expenditure in making their choices. Self-management, bounded rationality, and sequence preference are suggested as possible explanations for such behavior. |
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Keywords: | Intertemporal choice present value self management bounded rationality sequence preference |
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