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Lecture 46 Anomalies in DUM

Anomalies
- 'sign effect'
- 'magnitude effect'
- 'delay-speedup' asymmetry
- 'date/delay effect'
- violations of independence & preference for spread

1. The Sign Effect

  • Gains discounted more than losses
  • e.g. Thaler 1981: Traffic ticket
    • Confounding factors: forgetting or delaying in hope to evade
  • People prefer to incur a loss immediately
  • Negative discount rate for losses
  • Bilgin and LeBoeuf: 'temporal loss-aversion'

If a person is moving to a new city and doesn't want to move… the interval of time appears to be shorter than if he was looking forward to.
- A smaller discount rate would be used

Another example, meeting a well-wisher after a long time (few years). Even a wait for 2 days seems longer.

  • Temporal loss-aversion occurs because losses attract more attention than gains
  • Anticipatory utility: people don't like the idea of losses 'hanging over' them. "Just slap me already!"
  • Evolutionary explanation: when danger is imminent, its better to exaggerate it's proximity, rather than thinking that it's far away.
    • This error can be life saving
  • Bentham: Anticipation has an impact on immediate well-being. Individuals can feel:
    • Memory of the past
    • Sensation of present
    • Anticipation of future
      • Jevons: Anticipal pleasure or pain

DUM or EDU doesn't explain how expectation can increase the utility generated. "savoring" and "dread"

  • Painful events are brought forward (shock) and pleasurable events (kiss) are pushed to some later date.

2. The 'Magnitude Effect'

  • Large outcomes are discounted at a lower rate than small ones
Immediately In a year Times Discount rate
$15 $60 4 300%
$250 $350 1.4 40%
$3000 $4000 1.3 30%
  • Opposite direction to the effect of DMU
  • Larger losses are discounted at ta higher rate than smaller losses

Both Sign and Magnitude effect can be explained by resolution theory… Consumers have a desire to resolve both gains and losses immediately.

  • Avoid deprivation of waiting for a gain
  • Close the mental account of a loss

3. The 'Delay-Speedup' Asymmetry

  • When you don't expect to receive something for another year, we would pay $54 to receive it now (perceived gain)
  • When you expect to receive it immediately. But it gets delayed by an year, you will demand $126 for the delay (a perceived loss)

Subject demand more to accelerate a perceived loss, than a perceived gain.

4. Preferences for improving sequences

  • People have a preference for improving sequences (even if the totals match)
  • Headache

5. The 'Date/Delay Effect'

  • Framing effect

  • Lower discount rates when time periods are described using end dates rather than as extents

    • "How much.. in eight months…"
      • Demanded a larger amount here…
    • "How much… on October 15…"

  • Psychological explanation: Date = relatively abstract point in time. May not even compute the interval length.

  • Delay/extent = Definition of the amount of time is highlighted (perceived longer \(\implies\) higher discount rate)