How to measure discount rates?

1. How to measure discount rates? An experimental comparison of three methods David Hardisty, Katherine Thompson, Dave Krantz, & Elke Weber Columbia University 2010 Behavioral Decision Research in Management Conference June 11th 2010

2. Co-Authors Katherine Thompson Dave Krantz Elke Weber

3. The Discounting Bandwagon

4. Incidence of discounting at BDRM 2010 10% (7 out of 69 talks)

5. What is Discounting? • We discount the value of future events • Example: with a 10% discount rate, $100 delayed one year is worth the same as $90 today • Multiple factors determine discounting behavior

6. (figure courtesy of Olivola & Wang, 2009)

7. Matching Choice: Multiple Staircase Choice: Titration

8. So, what are matching, titration, and multiple staircase?

9. Matching Please fill in the amount that would make the following two options equally attractive: A. Receive $300 immediately B. Receive $____ ten years from now

10. Choice: Titration Please choose which option you prefer in each pair:

11. Choice: Multiple Staircase • Dynamic version of titration • Funnels into the indifference point • Adapted from psychophysics (Gracely et al, 1988)

12. 1.

13. 2.

14. 3.

16. *Multiple* Staircase? • Several different staircases are interleaved, to reduce order effects or false consistency

17. MultipleStaircase! Titration! Matching!

18. Questions • How do they differ in discount rates? • ...for novel and complex scenarios? • How well do they predict consequential intertemporal choices?

19. Participants • 316 US residents, recruited and run online • mean age = 41 (SD = 14) • paid $8, plus lottery

20. Methods Overview • 3 x 2 x 3 x 2 mixed design • 3: between subjects: matching (n=154), titration (n=82), or staircase (n=80) • 2: between subjects: gain or loss • 3: within subjects: delay of 1, 10, or 50 years • 2: within subjects: financial or air quality

21. Financial Gain Scenario Imagine the city you live in has a budget surplus that it is planning to pay out as rebates of $300 for each citizen. The city is also considering investing the surplus in fixed-interest endowment funds that will mature at different possible times in the future. Investing in a fund would allow the city to offer rebates of a different amount, to be paid when the fund matures...

22. Financial Gain Questions

23. Mean Discount Rates .60 .50 .40 gain .30 discount rate loss .20 .10 .00 matching multiple-stairs titration method: F(2,307)=9.3, p<.001; sign: F(1,307)=13.7, p<.001; interaction: F(2,307)=1.1, p=.35

24. Why does this happen?

25. Titration Scale Note: staircases used the same range as titration

26. Titration Scale from Hardisty & Weber (2009), Study 2

27. 1-year discount rate for present study vs Hardisty & Weber (2009) 16% 80%

28. Anchoring effects • Obviously range matters • Order also matters (Ariely et al, 2003)

29. Titration Scale: Two Orders

30. Titration Scale: Two Orders interaction: F(1,76)=4.8, p<.05

31. But matching is not immune to anchoring either...

32. Order Effects: On Matching 1.00 .90 .80 .70 .60 gain discount rate .50 loss .40 .30 .20 .10 .00 matching matching, after m- matching, after staircase titration method: F(2,304)=22.1, p<.001; sign: F(1,304)=35.1, p<.001; interaction: F(2,304)=1.6, p=.2

33. Minimal Anchoring MultipleStaircase! Titration! Matching!

34. Part 2:Easy to Use? MultipleStaircase! Titration! Matching!

35. Air Quality Gain Scenario Imagine the current air quality (measured by number and size of particulates) in your area is neither particularly good nor especially bad. The local government has a budget surplus that it will either return to the citizens as rebates, or spend to enact various policy and infrastructure changes that will lead to a permanent improvement in air quality. Once the changes are put into place, the air will feel surprisingly clean and fresh...

36. Air Quality Gain Questions Please fill in the amount that would make the following options equally attractive: A. Improved air quality starting nowB. Receive $____ immediately A. Improved air quality starting one year from nowB. Receive $____ immediately ...

37. Air Quality Discount Rates .50 .40 .30 .20 gain discount rate loss .10 .00 -.10 matching multiple-stairs titration -.20 method: F(2,304)=14.3, p<.001; sign: F(1,304)=3.7, p=.06; interaction: F(2,304)=4.1, p<.05

38. Easily Usable MultipleStaircase! Titration! Matching!

39. Part 3:Predicting Consequential Intertemporal Choices MultipleStaircase! Titration! Matching!

40. Consequential Choice • $100 now, or $200 next year? Logistic regressions, using 1-year discount rates to predict choosing the future $200:

41. Life Choice • Do you smoke? Y/N Logistic regressions, using 1-year discount rates to predict smoking: (consistent with Chabris et al, 2008; Reimers et al, 2009)

42. Predicts Consequential Intertemporal Choices MultipleStaircase! Titration! Matching!

43. Conclusions • Dynamic, multiple-staircase method not any better than simple titration • Order and range of choice options matters for discount rates, too

44. Minimal anchoring Unlimited range Quick Easy for participants to answer Predicts consequential choices Summary Matching Titration

45. Other cool elicitation methods • Evaluating sequences of outcomes (Chapman, 1996; Guyse, 2002) • Intertemporal allocation (Frederick, 2008) • Patience auction (Olivola & Wang, 2009) • Ask directly for discount rates (Read et al, working paper)

46. Special Thanks To... • NSF grant SES-0820496 • PAM lab & CRED lab • The Center for Decision Sciences

47. Thank You!

48. References Ariely, D., Loewenstein, G., & Prelec, D. (2003). “Coherent arbitrariness”: Stable demand curves without stable preferences. The quarterly journal of economics, 118, 73-105. Chabris, C. F., Laibson, D., Morris, C. L., Schuldt, J. P. & Taubinsky, D. T. (2008). Individual laboratory-measured discount rates predict field behavior. Journal of Risk and Uncertainty, 37, 237. Chapman, G. B. (1996). Expectations and preferences for sequences of health and money. Organizational behavior and decision processes, 67, 59-75. Frederick, S., Loewenstein, & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40, 351-401. Frederick, S., & Loewenstein, G. (2008). Conflicting motives in evaluations of sequences. Journal of Risk and Uncertainty, 37, 221-235. Guyse, J. L., Keller, L. R., & Eppel, T. (2002). Valuing environmental outcomes: Preferences for constant or improving sequences. Organizational behavior and decision processes, 87, 253-277. Hardisty, D. J. & Weber, E. U. (2009). Discounting future green: money versus the environment. Journal of experimental psychology: General, 138, 239-340. Read, D., Airoldi, M., & Loewe, G. (working paper). Intertemporal tradeoffs priced in interest rates and amounts: A study of method variance. Reimers, S., Maylor, E. A., Stewart, N., & Chater, N. (2009). Associations between a one-shot delay discounting measure and age, income, education and real-world impulsive behavior. Personality and individual differences, 47, 973-978. Olivola, C., & Wang, S. (2009). Patience auctions: Novel mechanisms for eliciting discount rates and the impact of time vs. money framing. Presented at the Center for Decision Sciences.

49. Extra Slides

50. Timing • M-Staircase participants took 380s longer than titration participants (54s longer per timescale)