Eliciting individual discount rates

How Soon Is Now? Evidence of Present Bias from Convex Time Budget Experiments

“…So, sophisticated subjects may treat dated experimental payments as a(nother) form of credit, integrating their (present-discounted) experimental income into an optimal forward-looking consumption plan -in which case, choices in the lab will reflect market interest rates and (perhaps) individual liquidity constraints, but not individual preferences (Coller and Williams 1999, Dean and Sautmann 2016, Carvalho, Meier, and Wang 2016. Second, even if one assumes that tradeoffs in experiments with money payments are driven by time preferences, should static preference reversals be interpreted as evidence of present bias?…”

“…See Coller and Williams (1999) for an early discussion of the issue. Meier and Sprenger (2010) find little evidence that experimentally-measured discount rates are predicted by liquidity constraints outside of the lab.…”

“…However, most experimental economists -including those using lab experimental methods to study discounting -assume that subjects engage in narrow bracketing, viewing their dated lab experimental payments in isolation, as though they were consumption plans (Andersen, Harrison, Lau, andRutström 2008, Rabin andWeizsacker 2009). Coller and Williams (1999) were some of the first to question this assumption, highlighting the fact that experimental subjects with access to credit should engage in arbitrage, choosing immediate payments when the gross interest rate within the experiment is lower than their return on savings, and choosing delayed payments when the experimental return is lower than their cost of borrowing. More recently, Dean and Sautmann (2016) provide evidence that the intertemporal tradeoffs made by subjects in their (lab-in-the-field) experiment are related to liquidity constraints and accumulated savings outside of the lab -suggesting that the narrow bracketing assumption fails in their data.…”

“…49 CTB experiments allow for explicit tests of the extent to which subjects engage in these types of arbitrage between lab and non-lab savings vehicles (Giné, Goldberg, Silverman, and Yang 2017): because (many of) the implicit interest rates offered in experiments are typically well above those available through the credit market, subjects who integrate lab payments into fully-optimal forward-looking consumption plans should only choose immediate consumption if 49 Of course, it is entirely possible that both of these extreme modeling assumptions -narrow bracketing with 0 background consumption and full dynamic optimization -fail to provide a psychologically realistic description of the ways human beings actually make financial decisions (both inside and outside the lab). If savings are illiquid or there are substantial transaction costs to borrowing or lending, people are unlikely to engage in the types of arbitrage proposed by Coller and Williams (1999), and the tradeoffs made in the lab (over moderate amounts of money) are likely to have little to do with the market interest rate. The same may be true if there are large cognitive costs in forming an optimal forward-looking consumption and savings plan (or re-optimizing in response to a moderately-sized shock).…”

“…On the one hand, as many have pointed out, it is not clear that we should observe present bias in decisions about money -even if humans are present-biased. Utility is defined over consumption, so if subjects are able to borrow and save, intertemporal tradeoffs over dated money payments should depend on market interest rates, not individual preferences (Coller and Williams 1999, Dean and Sautmann 2016, Augenblick, Niederle, and Sprenger 2015. Experimental economists, in contrast, have long argued that experimental subjects "narrowly bracket" their decisions in the lab, viewing dated monetary payments as though they were a consumption plan, and numerous experimental studies have supported this view (Andersen, Harrison, Lau, andRutström 2008, Rabin andWeizsacker 2009).…”