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School of Economics and Business, Norwegian University of Life Sciences Working Paper Series, School of Economics and Business, Norwegian University of Life Sciences

No 13-2015:
Bounded awareness and anomalies in intertemporal choice: Google Earth as metaphor and model

Stein Holden () and John Quiggin

Abstract: This paper draws on recent developments in the theory of choice under uncertainty to model anomalies in intertemporal choice. Cognitive limitations leading to hyperbolic discounting and magnitude effects in intertemporal choice may be described in terms of bounded awareness, and represented by phenomena familiar from visualization software such as Google Earth. Cognitive limits on visualization impose constraints on both the area being viewed and the level of detail of the view, with a trade-off between the two. Increasing detail at the expense of limiting the area viewed may be described as zooming. Data from a field experiment were used to assess the theory with an incentivecompatible multiple price list approach involving magnitude levels of 5x, 10x and 20x the basic magnitude level with time horizons of one, three, six and 12 months. Without zooming adjustments in base consumption, very strong hyperbolic and magnitude effects were found, and present bias could not explain the hyperbolic effects. The zooming model provides an explanation of what appear to be significant intertemporal anomalies in the data.

Keywords: Intertemporal choice; hyperbolic discounting; magnitude effects; zooming; limited asset integration; field experiment; calibration test.; (follow links to similar papers)

JEL-Codes: C93; D03; D91; (follow links to similar papers)

40 pages, June 15, 2015

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