Examining the Effect of Short-Term Affect on Farmers’ Risk and Time Preferences in Financial Decision-Making

Farmers regularly make intertemporal decisions under risk or uncertainty. To improve how farmers behave when faced with decisions that have financial consequences, there is a need for a deeper understanding of farmers’ risk and time preferences. While the relationship between individual components of affect and risk preferences is well documented, the same cannot be said for holistic measures of affect on one hand, and for affect and time preferences on the other hand. The data analysed in this paper is the 2014–2015 Indonesian Family Life Survey Wave 5. The survey included experimental measures designed to elicit both risk and time preferences from the same subjects. We analysed the data using limited dependent variable regression models. Our findings strengthen what is known about the affect infusion model. With increased pleasant affect, farmers’ willingness to take risks increases significantly. The results also suggest that pleasant affect is associated with increased odds that farmers will choose future rewards in the long horizon but had no statistically significant effect on the short horizon. The practical implications are that an experience of pleasant affect before decision-making may cause the decision-maker (DM) to perceive a prospect as having high benefits and low risks. Pleasant affect may also induce lower sensitivity towards losses and play the role of a buffer which reduces the immediate negative impact of information that otherwise would prevent the DM from focusing on the long-term. JEL Classifications: C93, D81, D91

Intertemporal choice reflects value comparison rather than self-control: insights from confidence judgments

Intertemporal decision-making has long been assumed to measure self-control, with prominent theories treating choices of smaller, sooner rewards as failed attempts to override immediate temptation. If this view is correct, people should be more confident in their intertemporal decisions when they “successfully” delay gratification than when they do not. In two pre- registered experiments with built-in replication, adult participants (n=117) made monetary intertemporal choices and rated their confidence in having made the right decisions. Contrary to assumptions of the self-control account, confidence was not higher when participants chose delayed rewards. Rather, participants were more confident in their decisions when possible rewards were further apart in time-discounted subjective value, closer to the present, and larger in magnitude. Demonstrating metacognitive insight, participants were more confident in decisions that better aligned with their independent valuation of possible rewards. Decisions made with less confidence were more prone to changes-of-mind and more susceptible to a patience-enhancing manipulation. Together, our results establish that confidence in intertemporal choice tracks uncertainty in estimating and comparing the value of possible rewards – just as it does in decisions unrelated to self-control. Our findings challenge self- control views and instead cast intertemporal choice as a form of value-based decision-making about future possibilities.

The key role of quoted spreads in financial services and transactions

Banking has driven the development of the world for centuries. An interesting issue to analyze is the optimal spread on financial products reflecting the value added that does not generate economic distortions for consumers in intertemporal decisions. Based on a gravity equation for these services, this paper examines the optimality of a modified Quoted Spread, the recently-proposed mobile-ratio, by assessing whether the pure interest expressed as a gravity equation between interests does not change after applying this spread. Results show that the mobile-ratio is the specification of the spread with no distortions on investment decisions. Regarding fiscal policy, this ratio plays a key role for both the Financial Transaction Tax and the VAT on financial services.

Percent framing attenuates the magnitude effect in a preference-matching task of intertemporal choice

A robust phenomenon in intertemporal decisions—the magnitude effect—shows that people value future gains less than equivalent but immediate gains by a factor known as the discount rate (i.e., people want a premium for waiting to receive a reward). However, the psychological underpinnings of this effect are not yet fully understood. One explanation proposes that intertemporal choices are driven by comparisons of features of the present and future choice options (e.g., information on rewards). According to this explanation, the hypothesis is that the magnitude effect is stronger when the absolute difference between present and future rewards is emphasized, compared to when their relative difference is emphasized. However, this hypothesis has only been tested using one task (the two-choice paradigm) and only for gains (i.e., not losses). It’s therefore unclear whether the findings that support the hypothesis can be generalized to different methodological paradigms (e.g., preference matching) and to the domain of losses. To address this question, we conducted experiments using the preference-matching method whereby the premium amounts that people could ask for were framed in terms of either currencies (emphasizing absolute differences) or percentages (emphasizing relative differences). We thus tested the robustness of the evidence in support of the hypothesis that percent framing, relative to currency framing, attenuates the magnitude effect in the domain of gains (Studies 1, 2, and 3) and in the domain of losses (Study 1, 3, and 4). Study 5 ruled out floor effects as an alternative explanation for the results in the losses domain. Overall, the results support the hypothesis.

Discounting and life cycle assessment: a distorting measure in assessments, a reasonable instrument for decisions

Although the weighting of environmental impacts against each other is well established in life cycle assessment practice, the weighting of impacts occurring at different points in time is still controversial. This temporal weighting is also known as discounting, which due to its potential to offend principles of intergenerational equity, is often rejected or regarded as unethical. In our literature review, we found multiple disputes regarding the comprehension of discounting. We structured those controversial issues and compared them to the original discounted utility model on which discounting is based. We explain the original theory as an intertemporal decision instrument based on future utility. We conclude that intertemporal equity controversies can be solved if discounting is applied as an individual decision instrument, rather than as an information instrument, which could underestimate environmental damages handed to future generations. Each choice related to discounting—including whether or not to discount, or to discount at a rate of zero—should be well-founded. We illustrate environmental decision-related problems as a multidimensional issue, with at least three dimensions including the type of impact and spatial and temporal distributions. Through discounting framed as a decision instrument, these dimensions can be condensed into an explicit result, from which we can draw analogies to both weighting in life cycle assessment and financial decision instruments. We suggest avoiding discounting in environmental information instruments, such as single-product life cycle assessments, footprints, or labels. However, if alternatives have to be compared, discounting should be applied to support intertemporal decisions and generate meaningful results.