Adv Behav Econ pdf

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F R E D E R I C K E T A L .
discounted more than losses; small amounts are discounted more than large
amounts; greater discounting is shown to avoid delay of a good than to expedite
its receipt; in choices over sequences of outcomes, improving sequences are often
preferred to declining sequences though positive time preference dictates the op-
posite; and in choices over sequences, violations of independence are pervasive,
and people seem to prefer spreading consumption over time in a way that dimin-
ishing marginal utility alone cannot explain.
THE “SIGN EFFECT” (GAINS ARE DISCOUNTED MORE THAN LOSSES)
Many studies have concluded that gains are discounted at a higher rate than losses.
For instance, Thaler (1981) asked subjects to imagine they had received a traffic
ticket that could be paid either now or later and to state how much they would be
willing to pay if payment could be delayed (by three months, one year, or three
years). The discount rates imputed from these answers were much lower than the
discount rates imputed from comparable questions about monetary gains. This pat-
tern is prevalent in the literature. Indeed, in many studies, a substantial proportion
of subjects prefer to incur a loss immediately rather than delay it (Benzion,
Rapoport, and Yagil 1989; Loewenstein 1987; MacKeigan et al. 1993; Mischel,
Grusec, and Masters 1969; Redelmeier and Heller 1993; Yates and Watts 1975).
THE “MAGNITUDE EFFECT” (SMALL OUTCOMES ARE DISCOUNTED MORE THAN LARGE ONES)
Most studies that vary outcome size have found that large outcomes are dis-
counted at a lower rate than small ones (Ainslie and Haendel 1983; Benzion,
Rapoport, and Yagil 1989; Green, Fristoe, and Myerson 1994; Green, Fry, and
Myerson 1994; Holcomb and Nelson 1992; Kirby 1997; Kirby and Marakovic
1995; Kirby, Petry, and Bickel 1999; Loewenstein 1987; Raineri and Rachlin
1993; Shelley 1993; Thaler 1981). In Thaler’s (1981) study, for example, respon-
dents were, on average, indifferent between $15 immediately and $60 in a year,
$250 immediately and $350 in a year, and $3,000 immediately and $4,000 in a
year, implying discount rates of 139%, 34%, and 29%, respectively.
THE “DELAY-SPEEDUP” ASYMMETRY
Loewenstein (1988) demonstrated that imputed discount rates can be dramati-
cally affected by whether the change in delivery time of an outcome is framed as
an acceleration or a delay from some temporal reference point. For example, re-
spondents who didn’t expect to receive a VCR for another year would pay an av-
erage of $54 to receive it immediately, but those who thought they would receive
it immediately demanded an average of $126 to delay its receipt by a year. 
Benzion, Rapoport, and Yagil (1989) and Shelley (1993) replicated Loewenstein’s
findings for losses as well as gains (respondents demanded more to expedite pay-
ment than they would pay to delay it).
PREFERENCE FOR IMPROVING SEQUENCES
In studies of discounting that involve choices between two outcomes—for exam-
ple, 
X
at 
t
versus 
Y 
at 
t
9
—positive discounting is the norm. Research examining

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preferences over 
sequences 
of outcomes, however, has generally found that peo-
ple prefer improving sequences to declining sequences (for an overview see
Ariely and Carmon, in press; Frederick and Loewenstein 2002; Loewenstein and
Prelec 1993). For example, Loewenstein and Sicherman (1991) found that, for an
otherwise identical job, most subjects prefer an increasing wage profile to a de-
clining or flat one (see also Frank 1993). Hsee, Abelson, and Salovey (1991)
found that an increasing salary sequence was rated as highly as a decreasing se-
quence that conferred much more money. Varey and Kahneman (1992) found that
subjects strongly preferred streams of decreasing discomfort to streams of in-
creasing discomfort, even when the overall sum of discomfort over the interval
was otherwise identical. Loewenstein and Prelec (1993) found that respondents
who chose between sequences of two or more events (for example, dinners or va-
cation trips) on consecutive weekends or consecutive months generally preferred
to save the better thing for last. Chapman (2000) presented respondents with hy-
pothetical sequences of headache pain that were matched in terms of total pain
that either gradually lessened or gradually increased with time. Sequence dura-
tions included one hour, one day, one month, one year, five years, and twenty
years. For all sequence durations, the vast majority (from 82 to 92%) of subjects
preferred the sequence of pain that lessened over time (see also Ross and 
Simonson 1991).
VIOLATIONS OF INDEPENDENCE AND PREFERENCE FOR SPREAD
The research on preferences over sequences also reveals strong violations of 
independence. Consider the following pair of questions from Loewenstein and
Prelec (1993):
Imagine that over the next five weekends you must decide how to spend your Saturday
nights. From each pair of sequences of dinners below, circle the one you would prefer.
“Fancy French” refers to a dinner at a fancy French Restaurant. “Fancy lobster” refers to
an exquisite lobster dinner at a four-star restaurant. Ignore scheduling considerations
(e.g., your current plans).
First
Second
Third
Fourth
Fifth
Options
weekend
weekend
weekend
weekend
weekend
A
Fancy
Eat at
Eat at
Eat at
Eat at
[11%]
French
home
home
home
home
B
Eat at
Eat at
Fancy
Eat at
Eat at
[89%]
home
home
French
home
home
First
Second
Third
Fourth
Fifth
Options
weekend
weekend
weekend
weekend
weekend
C
Fancy
Eat at
Eat at
Eat at
Fancy
[49%]
French
home
home
home
lobster
D
Eat at
Eat at
Fancy
Eat at
Fancy
[51%]
home
home
French
home
lobster