| Abstract: |
In this paper we formulate and investigate experimentally a model of how
individuals choose between time sequences of monetary outcomes. The
theoretical model assumes that a decision-maker uses, sequentially, two
criteria to screen options. Each criterion only permits a decision between
some pairs of options, while the other options are incomparable according to
that criterion. When the first criterion is not decisive, the decision maker
resorts to the second criterion to select an alternative. This type of
decision procedures has encountered the favour of several psychologists,
though it is quite under-explored in the economics domain. In the experiment
we find that: 1) traditional economic models based on discounting alone cannot
explain a significant (almost 30%) proportion of the data no matter how much
variability in the discount functions is allowed; 2) our model, despite
considering only a specific (exponential) form of discounting, can explain the
data much better solely thanks to the use of the secondary criterion; 3) our
model explains certain specific patterns in the choices of the 'irrational’
people. We can safely reject the hypothesis that anomalous behaviour is due
simply to random 'mistakes’ around the basic predictions of discounting
theories: the deviations are not random and there are clear systematic
patterns of association between 'irrational’ choices. |