Preferences over sequences of payments: A new validation of the [formula omitted]-exponential discounting

Abstract

The preference for incremental gains, or the improving sequence effect, has been presented as one of the most important anomalies in intertemporal choice. Usually, the experiments to verify this effect have been based on sequences of incomes, and most of them have shown a preference for an increasing sequence. The objective of this paper is to analyse this topic in the context of loan repayment plans where a preference for constant and decreasing over rising payments is expected. The methodology applied in this paper is based on the use of questionnaires in the same way as Hoelzl et al. (2011) to evaluate different loan plans with the same interest rates and durations. It clearly shows that people prefer those plans which repay more at the beginning of the loan duration. Thus, the main contribution of this paper is the use of the q-exponential discounting to explain this revealed decreasing sequence effect because the q-exponential discount function can exhibit the inconsistency in intertemporal choices based on a decreasing interest rate. Finally, recommendations are made for banking institutions when considering their strategies of interest rate offers in the context of bank marketing.