Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: We present and expand existing theories about why individuals may assess positive outcomes differently from negative outcomes in intertemporal choices. All of our theories – based on utility or cost considerations – predict a conventional magnitude effect for positive outcomes, i.e., a negative relation between outcome size and subjective discount rates. For negative outcomes, however, implications are different for utility- and cost-based approaches. We argue that the relevance of utility-based aspects is strengthened in a money frame, leading to a conventional magnitude effect even for negative outcomes, whereas cost-based considera¬tions gain in importance in an interest rate frame, implying, in contrast, a “reverse” magnitude effect, i.e. higher discount rates for (absolutely) higher outcome size. By conducting a web-based experiment with 676 participants, we confirm our theoretical findings and conclude: the conventional magnitude effect prevails for positive outcomes in the money and the interest rate frame and for negative outcomes in the money frame. However, there is a reverse magnitude effect for negative outcomes in the interest rate frame. Our results might help to better understand prevailing magnitude effects in practical applications and might also be apt to derive suggestions for better designing of intertemporal decision problems.

Keywords: Discounting anomalies; Intertemporal choice; Framing; Magnitude effect; Reverse magnitude effect

JEL-codes: D14; D90; D91; G02; G12

76 pages, December 28, 2020

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