Long-Range Financial Decision-Making: The Role of Episodic Prospection

Abstract

Individuals often show time-inconsistent preferences when making intertemporal choices for monetary rewards. Time-inconsistent preferences generally emerge when observing the devaluation of outcomes over time (temporal discounting) that do not follow an exponential discounting function, but rather hyperbolic discounting. In this paper, we argue that temporal discounting is sensitive to the type of prospection involved. Given that episodic prospection (when individuals can vividly envisage possible future events) increases the subjective importance of a future reward, we investigate if and how it can effectively attenuate human biases of temporal discounting. Our findings suggest that episodic prospection might attenuate intertemporal choice inefficiencies, when in the form of hyperbolic discounting. This was found to be particularly true if the solicited scenario referred to a primary need (a first priority).

Appendix A: Task-Instructions

Introduction presented by the experimenter:

“During the following scenarios, we are going to simulate some real-life situations—that most people your age will face at some point: you will be asked to make decisions in relation to the three scenarios, which regard the following fields: Work, consumption goods, and travel.

In each scenario, your task is to make a decision. You have to choose between two rewards: One is small and immediately available, and the other one is bigger and only available in the future.

Remember, you must consider every scenario as if it were real and not a simulation. So before you answer, try to imagine that the situation is occurring right now and real-life decisions are being taken.

Is everything clear? Ok, let’s start!”

Scenario 1: “Travelling” (Negotiation With the Experimenter, Who Plays the Role of Website Manager)

“For months you have been writing your opinions on a website, in which users are invited to post their opinions about the services they have used. Specifically, you have posted your opinions about the hotels, restaurants and clubs you visited during your recent trips. Now, the company owning this website wants to reward you because of the “usefulness” and the “high quality” of the opinions you posted. The prize is a sum of 300 Euros, offered by the online company in order for you to book another trip with them. However, the website offers you a choice: You can accept the 300 Euros now, and spend them immediately (within the next week), or you can decline the prize, but keep on writing your opinions and accumulate additional points in order to negotiate an even bigger future prize.

Here’s an example: If the website offers you 300 Euros now, but you choose to decline it in preference of waiting another month, for example, for an even bigger prize, you have to tell the website how much money would you like to receive after the additional month of posting your opinions. Remember, you’re making a deal with the website; that means that the website will only accept your counter-offer if it is reasonable and fair.

The amount that you request must be reasonable: Try to imagine that the situation is really happening (for example, requesting 5000 Euros after a month is not reasonable! In such a case, the proposal will be refused and you will lose all opportunity to win the monetary credit to spend on travelling because you have already refused the initial 300 Euros offer).”

Note: The entire amount of money awarded must be spent on a single holiday (that includes all of the following: Transport, food, accommodation, souvenirs, entertainment, and so on. For example, if you have for example a friend who lives in London and can host you, it does not qualify and you will not receive money in relation to accommodation).

Every time you make a choice, please think about how you will spend the money realistically (ask yourself, for example: Where do I want to travel? By train, bus, plane…? How many days? Alone or with another person? Where could I sleep and eat?). Remember that the situation is supposed to be real, so your planned holiday is not hypothetical but real!

Is everything clear? Ok, let’s start.’

The interviewer receives the Matlab interface, negotiates his/her choices, and then inserts them into the computer, as shown in Fig. 10.2.

Fig. 10.2

Matlab interface (Source: Authors elaboration)

Scenario 2: “Loan to Your Company’ (Negotiation With the Experimenter, Who Plays the Role of Company Director)”

“Imagine that you are an employee working in my company, so I’m your boss.

During the last months, you and other employees proved to be very proficient at your work, and you all won a prize as the best employees of the year. The prize that each employee is offered is 900 Euros. The company has chosen to offer you this prize, despite its present financial difficulties.

This is your boss’s offer: You can accept 900 Euros immediately and spend it whenever and however you want, or you can choose to “leave it for a while” with the company—this means that the company effectively borrows your money in order to reinvest it in the company and its employees (so you too).

The loan can be short-term or long-term—you decide. You must decide if and for how long the company can borrow your prize money. You must also stipulate the amount of money you wish to receive at the end of this period.

Note, that if you chose to receive the 900 Euros now, the financial situation of your company could worsen; if the financial difficulties increase beyond a certain point, the possibility exists that you and the other employees could be made redundant in a few months’ time.

On the other hand, if you chose to wait, the company’s situation might improve in the future and that would, in part, be thanks to you and the company will pay you the amount of money that you have agreed.

Remember, if you choose to lend the company your prize and to wait for a while, your counter-offer must be reasonable and fair.

Moreover, note that you cannot ask the company for more than 2700 Euros, and you don’t know anything about the other employees’ decisions.

During the task, remember to consider the situation as being real. Try to project yourself and the company into the future.

Is everything clear so far? Ok, let’s start!”

The interviewer receives the Matlab interface, negotiates his/her choices, and then inserts them into the computer.

Scenario 3: “Saving for a Treat” (No Negotiations are Made With the Experimenter: Autonomous Decision-Making)

“Over recent months you’ve worked hard and managed to save 50 Euros. You’re up to date with payments (rent, food, taxes… everything that concerns your personal maintenance), so you’re thinking about giving yourself a treat. You also consider another alternative: You could wait a while longer, for example, one month more, keep on saving money end give yourself a later, but bigger treat. What would you prefer?

When you make your decision, please think realistically about what you would like to buy (for example: do you want to treat yourself to a new pair of shoes, sunglasses, shirt or dress, and so on). You can also choose to spend your savings on a present for another person.

If you choose to save money for an additional six months, for example, please consider carefully how much money you would realistically be able to save in that time: That means that you have to consider your monthly income and all of your future payments.

nIs everything clear so far? Ok, let’s start!”

The interviewer receives the Matlab interface, makes his/her choices, and then inserts them into the computer.