Preferences Show Greater Stability for Transactions than for Gambles in Cost Discounting

Stephen Jones,Mike Oaksford

doi:10.3389/fpsyg.2011.00293

Abstract

Many factors point to the underlying instability of preferences in choice behavior. In particular, discounting reveals some effects not consistent with stable preferences. In discounting, the subjective value of a reward reduces as the uncertainty of or delay to obtaining it increases. The function relating subjective value to delay or probability must be exponential with a constant discount rate to respect transitivity over time, i.e., if A > B and B > C, then A > C (“ > ” = is preferred to). If the discount rate varies with value or time, then it is possible for transitivity to be violated, i.e., for preferences to be unstable. And people do show unstable, preference reversals over time in intertemporal choice more consistent with a hyperbolic discounting function (e.g., Myerson and Green, 1995). Thus, while someone may prefer £100 for certain now rather than £110 tomorrow, they will prefer £110 in a year and a day over £100 in a year’s time. People discount rate is very high initially, more rapid than the exponential, but over time it decreases leading to a flatter function than the exponential. Consequently, the £10 difference is almost totally discounted in the short term, but in a year’s time the extra day barely reduces the subjective value we attach to gaining an extra £10.

Highlights

Further effects are inconsistent with the reasonable assumption that delay works by increasing uncertainty
This picture is further complicated by the fact that for discounting losses, there seems to be no effect of amount for temporal discounting and inconsistent effects for probabilistic discounting (e.g., Mitchell and Wilson, 2010)
These effects of amount violate the axioms of expected utility theory but are not consistent with descriptive decision theories such as prospect theory

Summary

Introduction

Further effects are inconsistent with the reasonable assumption that delay works by increasing uncertainty. Jones and Oaksford (2011) observed that most of these results were obtained using gambles, whereas most people rarely receive a gain or incur a loss outside the context of a transaction, e.g., a choice of paying £10 to own a commodity or of paying £20 in 6 months time to own the commodity now. Jones and Oaksford (2011) argued that using transactional problem content rather than gambles may alter people’s decision-making.

Results

Conclusion