Discount Rates Inferred from Decisions: An Experimental Study

TLDR

A 204‑student intertemporal choice experiment varied scenario, delay, and cashflow size in a 4×4×4 design, from which individual discount rates were inferred and used to test four competing hypotheses. The study rejected the classical uniform‑discount hypothesis and found market segmentation inadequate, while supporting both an implicit risk hypothesis linking delay to risk and an added compensation hypothesis requiring compensation for changes in financial position.

Abstract

Two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 × 4 × 4 factorial design: scenario (postponing a receipt, postponing a payment, expediting a receipt, expediting a payment), time delay (0.5, 1, 2, and 4 years), and size of cashflow ($40, $200, $1000, and $5000). Individual discount rates were inferred from the responses, and then used to test competitively four hypotheses regarding the behavior of discount rates. The classical hypothesis asserting that the discount rate is uniform across scenarios, time delays, and sums of cashflow was flatly rejected. A market segmentation approach was found lacking. The results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value, and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position.