The standard economic theory of intertemporal choice assumes that people act as if their subjective discount rates are constant over time. The discount rate is the rate at which people trade-off consumption increments at different points in time. The constant discount rate is a crucial condition for optimal consumption paths to be dynamically consistent
Thaler(1981) and Benzion, Rapoport and Yagil(1989), to name just a few, tested this stationarity assumption by using the method of reward choice experiments. They all found that the subjects in the experiments systematically violate the stationarity assumption and show three major anomalies:
(1) Immediacy effect: discount rate declines as the time necessary to wait increases,
(2) Magnitude effect: discount rate declines as the size of reward (or loss) increases,
(3) Gain/Loss Asymmetry: discount rate for gains is higher than for losses.
I conducted similar experiments (questionnaires) for Japanese subjects; one is for working people in general and the other for debtors, individuals with excessive debts and getting some counseling. One of the main results from the experiments is that the same anomalies were confirmed for Japanese subjects, too. The other is that the debtors exhibited an extremely high average rate of discount.
These results imply people’s natural (or cross-cultural) tendency for present-biased consumption. This present-biased preference may indicate that people are liable to borrow excessively when consumer credit is easily available for current consumption. These experimental results suggest that, to avoid excessive debts, people have to recognize and to control their own natural tendency. Consumer education and counseling services will also help people to become conscious of their present-biased preference and to man-age successfully their financial affairs or even debt problems.
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