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How do we evaluate future gambles? Experimental evidence on path dependency in risky intertemporal choice
Author(s) -
Öncüler Ayse,
Onay Selcuk
Publication year - 2009
Publication title -
journal of behavioral decision making
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.136
H-Index - 76
eISSN - 1099-0771
pISSN - 0894-3257
DOI - 10.1002/bdm.626
Subject(s) - lottery , discounting , econometrics , path (computing) , economics , time preference , intertemporal choice , choice set , prospect theory , expected utility hypothesis , value (mathematics) , mathematical economics , computer science , mathematics , microeconomics , statistics , finance , programming language
This study reports three experiments which demonstrate path dependency in risky intertemporal choice. Consider a lottery to be resolved and paid in a future time period. One can obtain the present value of this lottery in three different ways: (1) eliciting directly the present certainty equivalent (CE) of the future lottery (direct path); (2) eliciting the future CE and then discounting this amount to the present (risk‐time path); and (3) eliciting the present value of the risky prospect and then determining the CE of this current lottery (time‐risk path). Standard rational choice models such as the discounted expected utility model, assume a multiplicative model, where all three methods mentioned above would yield the same value. We conducted three studies to examine if this is the case: Experiments 1 and 2 were based on a set of matching‐task questions and Experiment 3 used a process‐tracing design to analyze the natural sequence of decision making by the subjects. These three studies show that the evaluation of future gambles is path‐dependent. The present values elicited under the time‐risk and direct paths are, on average, higher than those reported under the risk‐time path. In addition, we found evidence for a two‐stage evaluation of risky future prospects: When evaluating a future gamble, individuals first assess the present value of the gamble (time discounting) and then they determine a certainty equivalent (probability discounting). Copyright © 2008 John Wiley & Sons, Ltd.