Working Paper Series, School of Economics and Business, Norwegian University of Life Sciences
Bounded awareness and anomalies in intertemporal choice: Google Earth as metaphor and model
() 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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