The magnitude effect: Temporal discount rates and restaurant tips

Abstract

Decision makers show a larger subjective temporal discount rate for small magnitudes than for large ones. That is, they demand a larger percent increase in value to compensate for a delay when they are waiting for a small amount of money than for a large amount. Prelec and Loewenstein (1991; see also Loewenstein & Prelec, 1992) proposed an increasing proportional sensitivity account of this magnitude effect. This account surmises that the magnitude effect stems from the utility function for money and is consequently not unique to intertemporal choice. One study tested this prediction by demonstrating the magnitude effect in two domains: intertemporal choice and tipping for restaurant meals, haircuts, and taxi rides. In intertemporal choice, subjects showed a larger discount rate for smaller monetary amounts. They also tipped a larger percentage on small bills than on large bills. Thus, both domains showed the magnitude effect; however, the size of the effect was not well correlated between domains.