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I want it now!. Why discount rates for losses show reverse direction and reverse magnitude effects. David Hardisty, Kirstin Appelt, & Elke Weber Columbia University NSF SES-0345840 & SES-0820496 NIA 5R01AG027934-02 . Co-Authors. Kirstin Appelt. Elke Weber. Why study discounting?.

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i want it now

I want it now!

Why discount rates for losses show reverse direction and reverse magnitude effects

David Hardisty, Kirstin Appelt, & Elke Weber

Columbia University

NSF SES-0345840 & SES-0820496

NIA 5R01AG027934-02

co authors
Co-Authors

Kirstin Appelt

Elke Weber

why study discounting
Why study discounting?
  • Insufficient savings (Thaler & Benartzi, 2004)
  • Unhealthy behavior (Bickel et al., 1999)
  • Depletion of environmental resources (Hendrickx et al., 2001)
  • All involve myopic tradeoffs between immediate and future costs and benefits
  • Discounting the future means we want gains now and losses later
discounting anomalies
Discounting “Anomalies”
  • Sign effect: losses discounted less (Thaler, 1981; Hardisty & Weber, 2009)
  • Magnitude effect: large outcomes discounted less (Thaler, 1981)
  • Direction effect: more discounting when you delay than when you accelerate (Loewenstein, 1988; Weber et al., 2007)
reversals
Reversals
  • Direction and magnitude effects are eliminated or reversed for losses (Benzion et al., 1989; Shelley, 1993)

Unfortunately, forgotten. Why?

  • Don’t fit standard models
  • No process data
reconceptualizing impatience
Reconceptualizing Impatience
  • Impatience is “irrational” disutility of waiting
    • for gaining $100: I want it now
    • for losing $100: I want to get it out of the way now (Loewenstein, 1987)
  • Impatience is relatively insensitive to outcome magnitude (Benhabib et al., 2007)
  • This explains the sign effect, magnitude effect, direction effect, and their interactions
implications
Implications
  • For gains, impatience means more discounting
  • For losses, impatience means less discounting
explaining the sign effect
Explaining the Sign Effect
  • Get $1,000 now or $1,000 next year?+ uncertainty (Weber & Chapman, 2005; Epper et al., 2009)+ resource slack (Zauberman & Lynch, 2005)+ interest on investment (e.g., Franklin, 1784; Samuelson, 1937)+ impatience (Laibson, 1997) high discount rate
  • Pay $1,000 now or $1,000 next year?+++ other factors - impatience  lower discount rate
outline
Outline
  • Study 1: Sign, Magnitude, and Sign X Magnitude
  • Study 2: Sign, Direction, and Sign X Direction
  • Thought listings
  • National samples
  • Between-subjects designs
study 1

Study 1

Sign X Magnitude

study 1 participants
Study 1: Participants
  • 199 US residents, recruited and run online
    • 76% female
    • Range of ages, education, & income
  • $8 compensation
study 1 gain scenario
Study 1: Gain Scenario
  • Imagine there was a legitimate error on your back taxes in your favor, and you will immediately receive$10 [$10,000] from the government.
  • However, they are also giving you the option of receiving a different amount one year from now, instead. How much would the future amount need to be for you to choose it?
study 1 loss scenario
Study 1: Loss Scenario
  • Imagine there was a legitimate error on your back taxes against you, and you must pay the government $10 [$10,000] immediately
  • However, they are also giving you the option of paying a different amount one year from now, instead. How much would the future amount need to be for you to choose it?
discount parameter
Discount Parameter

V = A / (1 + kD)

k = (amount later - amount now)

amount now * delay

  • Increasing number indicates more discounting

(Mazur, 1987)

study 1 results
Study 1: Results

1.2

1

0.8

0.6

$10

mean k

$10,000

0.4

0.2

0

Gain

Loss

-0.2

explaining the magnitude effect for gains
Explaining the Magnitude Effect for Gains
  • Impatience is insensitive to magnitude
  • Therefore, impatience has relatively less influence on large magnitude outcomes
  • Lower discount rates for larger magnitudes
study 1 results19
Study 1: Results

1.2

1

0.8

0.6

$10

mean k

$10,000

0.4

0.2

0

Gain

Loss

-0.2

study 1 results20
Study 1: Results

1.2

1

0.8

0.6

$10

mean k

$10,000

0.4

0.2

0

Gain

Loss

-0.2

Sign: B = .45, p < .001; Magnitude: B = -.11, p = .07; Sign X Magnitude: B = -.22, p = .001

explaining the magnitude effect for losses
Explaining the Magnitude Effect for Losses
  • Impatience (to get it out of the way) is insensitive to magnitude
  • Therefore, impatience has relatively less influence on large magnitude outcomes
  • Higher discount rates for larger magnitudes
thought coding
Thought Coding

Six categories:

  • Future uncertainty
  • Expecting the money will be more useful now than in the future
  • Earning interest on investments
  • Other: what you ought to do (for example, “I should wait”)
  • Other: what you want (for example, “I want it now to get it over with”)
  • None of the above
thought coding23
Thought Coding

Six categories:

  • Future uncertainty
  • Expecting the money will be more useful now than in the future
  • Earning interest on investments
  • Other: what you ought to do (for example, “I should wait”)
  • Other: what you want (for example, “I want it now to get it over with”)
  • None of the above
want now thoughts
Want Now Thoughts

0.4

0.35

0.3

0.25

$10

Mean proportion want now thoughts

0.2

$10,000

0.15

0.1

0.05

0

Gain

Loss

Sign: B = -.26, p < .001; Magnitude: B = -.20, p < .01; Sign X Magnitude: B = .06, p = ns

process summary
Process Summary
  • Gains: greater magnitude  less impatience  less discounting
  • Losses: greater magnitude  less impatience  more discounting
study 1 mediation for gains
Study 1: Mediation for Gains

Proportion of “Want now” Thoughts

β = -.23, p <.05

β = + .19, p < .05

Magnitude

Discounting

(β = -.27, p < .01)

β = -.23, p < .05

Bootstrapping Test p < .05

study 1 mediation for losses
Study 1: Mediation for Losses

Proportion of “Want now” Thoughts

β = -.21, p < .05

β = - .23, p < .05

Magnitude

Discounting

(β = .35, p < .001)

β = .30, p < .01

Bootstrapping Test p < .05

study 1 conclusions
Study 1: Conclusions
  • Replicated sign & magnitude effects
  • Sign x Magnitude stronger than previous (within-subjects) studies
  • Want now thoughts mediate the magnitude effect for gains and losses
  • Impatience (as measured by want now thoughts) predicts discounting in opposite directions for gains and losses
study 2

Study 2

Sign x Direction

direction effect
Direction Effect
  • Delay: default is today, with option to receive larger amount later
  • Accelerate: default is later, with option to receive smaller amount sooner
  • Greater discounting for delay than accelerate (Loewenstein, 1988)
explaining the direction effect
Explaining the Direction Effect
  • Creates a default for now or for later
  • People are initially biased in favor of the default option (Query Theory, Weber et al., 2007)
  • Subsequent thoughts are influenced by this bias
  • Default predicts the order and balance of thoughts, which predict choices (Query Theory, Weber et al., 2007)
explaining the direction effect32
Explaining the Direction Effect
  • Creates a default for now or for later
  • People are initially biased in favor of the default option (Query Theory, Weber et al., 2007)
  • Subsequent thoughts are influenced by this bias
  • Default predicts the order and balance of thoughts, which predict choices (Query Theory, Weber et al., 2007)
explaining the direction effect33
Explaining the Direction Effect
  • Creates a default for now or for later
  • People are initially biased in favor of the default option (Query Theory, Weber et al., 2007)
  • Subsequent thoughts are influenced by this bias
  • Default predicts the order and balance of thoughts, which predict choices (Query Theory, Weber et al., 2007)
reminder
Reminder
  • For gains, impatience means greater discounting
  • For losses, impatience means lower discounting
study 2 participants
Study 2: Participants
  • 607 US residents
    • 75% women
    • Range of ages, education, & income
  • Same method as Study 1
study 2 gain scenarios
Study 2: Gain Scenarios
  • delay Imagine you have been selected to receive a $50 prize today. However, you also have the option of receiving a larger amount 3 months from now.
  • accelerate Imagine you have been selected to receive a $75 prize 3 months from today. However, you also have the option of receiving a smaller amount today.
study 2 gain scenarios37
Study 2: Gain Scenarios
  • delay Imagine you have been selected to receive a $50 prize today. However, you also have the option of receiving a larger amount 3 months from now.
  • accelerate Imagine you have been selected to receive a $75 prize 3 months from today. However, you also have the option of receiving a smaller amount today.
study 2 loss scenarios
Study 2: Loss Scenarios
  • delay Imagine that you have been ticketed for a parking violation, and are required to pay $50 today. However, you also have the option of paying a larger amount 3 months from now.
  • accelerate Imagine that you have been ticketed for a parking violation, and are required to pay $75 3 months fromtoday. However, you also have the option of paying a smaller amount today.
study 2 loss scenarios39
Study 2: Loss Scenarios
  • delay Imagine that you have been ticketed for a parking violation, and are required to pay $50 today. However, you also have the option of paying a larger amount 3 months from now.
  • accelerate Imagine that you have been ticketed for a parking violation, and are required to pay $75 3 months fromtoday. However, you also have the option of paying a smaller amount today.
study 2 discounting
Study 2: Discounting

1.60

Delay

Accelerate

1.20

0.80

k

0.40

0.00

-0.40

Gain

Loss

study 2 discounting41
Study 2: Discounting

1.60

Delay

Accelerate

1.20

0.80

k

0.40

0.00

-0.40

Gain

Loss

Sign: B = .34, p < .001 Direction: B = .07, p = .07 Sign X Direction: B = -.32, p < .001

study 2 thought measure
Study 2: Thought Measure
  • Prominence of Now Thoughts (Cronbach’s α = 0.91)
    • Proportion of now thoughts
    • Proportion of later thoughts (reverse scored)
    • Order of thoughts

Increasing number indicates more impatience

study 2 thoughts
Study 2: Thoughts

0.70

Delay

0.50

Accelerate

0.30

0.10

Prominence of Now Thoughts

-0.10

-0.30

-0.50

-0.70

Gain

Loss

study 2 thoughts45
Study 2: Thoughts

0.70

Delay

0.50

Accelerate

0.30

0.10

Prominence of Now Thoughts

-0.10

-0.30

-0.50

-0.70

Gain

Loss

Sign: B = -.36, p < .001 Direction: B = -.15, p < .001 Sign X Direction: B = -.06, p = .13

study 2 mediation for gains
Study 2: Mediation for Gains

Prominence of “Now” Thoughts

β = -.19, p = .006

β = +.62, p < .001

Direction

Discounting

(β = -.32, p < .001)

β = -.23, p = .004

Sobel Z = -2.64, p = .008

study 2 mediation for losses
Study 2: Mediation for Losses

Prominence of “Now” Thoughts

β = -.08, p = .06

β = - .60, p < .001

Direction

Discounting

(β = .49, p < .001)

β = .45, p < .001

Sobel Z = 1.89, p = .06

study 2 conclusions
Study 2: Conclusions
  • Replicate sign, direction, Sign x Direction
  • Now thoughts mediate direction effect for gains and losses
  • Impatience (as measured by now thoughts) predicts discounting in opposite directions for gains and losses
general conclusions
General Conclusions
  • Impatience is “irrational” disutility of waiting
    • I want gainsnow
    • I want to get losses out of the way now
general conclusions50
General Conclusions

Impatience

    • Explains Sign X Magnitude
    • Explains Sign X Direction
  • Sign is really important when thinking about discounting

Greater discounting of gains

Lower discounting of losses

thanks to
Thanks to...
  • The National Science Foundation: SES-03455840 & SES-0352062
  • The National Institute on Aging: 5R01AG027934-02
  • The CRED and PAM labs
thank you

Thank You!

www.davidhardisty.info

www.kirstinappelt.com

references 1
References (1)

Benhabib, J., Bisin, A., & Schotter, A. (2007). Present-bias, quasi-hyperbolic discounting, and fixed costs. Working paper. New York University.

Benzion, U., Rapoport, A., & Yagil, J. (1989). Discount rates inferred from decisions: An experimental study. Management Science, 35(3), 270-284.

Bickel, W. K., Odum, A. L., & Madden, G. J. (1999). Impulsivity and cigarette smoking: Delay discounting in current, never-, and ex-smokers. Psychopharmacology (Berlin), 146, 447-454

Franklin, B. (1748). Advice to a young tradesman.

Hardisty, D. J., & Weber, E. U. (2009). Discounting future green: Money vs the environment. Journal of Experimental Psychology: General, 138(3), 329-340.

Hendrickx, L., Poortinga, W., van der Kooij, R. (2001). Temporal factors in resource dilemmas. Acta Psychologica, 108, 137-154

Johnson, E. J., Häubl, G., & Keinan, A. (2007). Aspects of endowment: A query theory of value construction. Journal of Experimental Social Psychology: Learning, Memory and Cognition, 33(3), 461-474.

Laibson, D. (1997). Golden eggs and hyperbolic discounting. The Quarterly Journal of Economics, 112(2), 443-477.

Loewenstein, G. (1987). Anticipation and the valuation of delayed consumption. The Economic Journal, 97, 666-684.

Loewenstein, G. F. (1988). Frames of mind in intertemporal choice. Management Science, 34(2), 200-214.

references 2
References (2)

Samuelson, P. A. (1937). A note on the measurement of utility. A note on measurement of utility. The Review of Economic Studies, 4, 155-161.

Shelley, M. K. (1993). Outcome signs, questions frames and discount rates. Management Science, 39(7), 806-815.

Thaler, R. H. (1981). Some empirical evidence on dynamic inconsistency. Economics Letters, 8, 201-207.

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112, S164-S187.

Weber, B. J., & Chapman, G. B. (2005). The combined effects of risk and time on choice: Does uncertainty eliminate the immediacy effect? Does delay eliminate the certainty effect? Organizational Behavior and Human Decision Processes, 96, 104-118.

Weber, E. U., Johnson, E. J., Milch, K. F., Chang, H., Brodscholl, J. C., & Goldstein, D. G. (2007). Asymmetric discounting in intertemporal choice: A Query Theory account. Psychological Science, 18(6), 516-523.

Zauberman, G., & Lynch, J. J. G. (2005). Resource slack and propensity to discount delayed investments of time versus money. Journal of Experimental Psychology: General, 134(1), 23-37.

standardized median rank difference
Standardized Median Rank Difference

SMRD = 2 (MRl – MRn) / N

MRl = median rank of thoughts favoring later

MRn = median rank of thoughts favoring now

N = total number of now & later thoughts

  • Higher number indicates more “now” bias
study 2 query theory mediation
Study 2: Query Theory Mediation

Thought Order

β = -.13, p < .001

β = .32, p < .001

Proportion of Now Thoughts

(β = -.04, p = .01)

Direction

β = .00, p = .8

Sobel Z = -3.68, p < .001

study 2 mediation of sign effect
Study 2: Mediation of Sign Effect

Prominence of “Now” Thoughts

β = -.34, p < .001

β = .61, p < .001

Sign

Discounting

(β = .44, p < .001)

β = .50, p < .001

Sobel Z = -1.97, p = .05

study 1 choices66
Study 1: Choices

Indifference point: $10 today = $10.75 one year from today

supporting evidence that losses are different
Supporting evidence that losses are different
  • In both studies, CRT & age predicted discounting of delay framed gains, but not delay framed losses