Be patient when measuring hyperbolic discounting: Stationarity, time consistency and time invariance in a field experiment

Wendy Janssens,Berber Kramer,Lisette Swart

doi:10.1016/j.jdeveco.2016.12.011

Abstract

Hyperbolic discounting is one potential reason why savings remain low among the poor. Most evidence of hyperbolic discounting is based on violations of either stationarity or time consistency. Stationarity is violated when intertemporal choices differ for trade-offs in the near versus the more distant future. Time consistency is violated if the optimal allocation for specific dates changes over time. Both types of choice reversals may however also result from time-varying discount rates. Hyperbolic discounting is an unambiguous explanation for choice reversals only if the same individuals violate both stationarity and time consistency. Our field experiment in Nigeria examines the extent to which this is the case. The experiment measured both stationarity and time consistency for the same participants. Violations of the two rarely coincide, especially among more liquidity-constrained participants. Thus, in a context of liquidity constraints, eliciting only one type of choice reversal is insufficient to identify hyperbolic discounting.

Highlights

People often revise their initial choices regarding decisions to borrow, invest or perform a tedious task
Such dynamic choice reversals are called violations of time consistency. Another typical choice reversal concerns a violation of stationarity, for example when someone prefers $110 in 31 days over $100 in 30 days, but rather has $100 today instead of $110 tomorrow (Green, Fristoe and Myerson, 1994; Kirby and Herrnstein, 1995). Both violations are consistent with hyperbolic time preferences, meaning that implicit discount rates are lower for tradeoffs in the more distant future than for tradeoffs in the near future (Frederick, Loewenstein and O’Donoghue, 2002)
One can elicit violations of time consistency by means of a longitudinal design in which participants choose at different points in time whether to receive a sooner-smaller versus laterlarger payment, keeping the payment dates fixed

Summary

Introduction

People often revise their initial choices regarding decisions to borrow, invest or perform a tedious task. Someone may prefer to invest towards increased future consumption when asked far in advance, but change her mind right before investing the money, and opt for sooner but lower consumption Such dynamic choice reversals are called violations of time consistency. Another typical choice reversal concerns a violation of stationarity, for example when someone prefers $110 in 31 days over $100 in 30 days, but rather has $100 today instead of $110 tomorrow (Green, Fristoe and Myerson, 1994; Kirby and Herrnstein, 1995) Both violations are consistent with hyperbolic time preferences, meaning that implicit discount rates are lower for tradeoffs in the more distant future than for tradeoffs in the near future (Frederick, Loewenstein and O’Donoghue, 2002). They are the easiest and most common way to test for hyperbolic discounting

Methods

Results

Conclusion