I agree with your reasoning. I think it’s sort of silly to suppose that selecting $55 implying a high discount rate is necessarily less rational. If someone offered you $1.00 today or $1.03 tomorrow, it would be a very strange person who decides that they would prefer the $1.03, even though that’s a 4,848,172% rate of return. There are actually disutilities involved in keeping track of future cash inflows, even if small. But almost no one, even the triumphantly rich with very low marginal utilities associated with additional dollars, would prefer $55 million dollars now to $75 million dollars in 60 days. Perhaps drug addicts and the terminally ill would.
Of course, if someone said “Occasionally throughout your life we will surprise you with either $55 dollars, or $75 dollars 60 days later than the days we would have surprised you with $55,” it would then be silly to choose the $55 dollar scenario, because in that case there are no disutilities.
Interestingly, the survey data actually doesn’t seem to support the notion that those with higher incomes are more likely to take the money now. In fact, the data suggest that the wealthiest are slightly less likely to take the money today. For five quintiles, the P($55 now) is 8.4% for <$7,770, 6.2% for <$25K, 6.8% for <$50K, 6.4% for <$83K, and 5.0% for the top quintile. This is with N=593. This doesn’t include any analysis for potentially confounding factors.
I’m puzzled by your use of the word “actually” in the last paragraph. It sounds as if you’re saying you’d expect people with higher incomes to choose less money now over more money later. If so, why? I’d expect the reverse, for multiple reasons (and not only because apparently that’s what the survey shows).
I was thinking that wealthier people would have a lower level of utility associated with the additional marginal dollars they could get from waiting, so transaction costs and other disutilities would override the utility offered by having a greater number of dollars. I said “actually” only because this thinking is sort of in line with what I was discussing in my first paragraph.
I would think that if our hypothetical wealthy person was rich enough to not care all that much about an additional $20 million, they wouldn’t care enough about the initial $55 million to pick the short-term option that netted them less money.
If the utility of the dollars goes down, doesn’t the utility loss from transaction costs also go down? (Because if you care less about the money you can worry less about it. Extreme case: If I offer to give you $0 in a week, you don’t need to waste any time or effort keeping track of when I’m supposed to pay you.)
People get wealthy by prefering money in the feature over getting utility right now.
There a bunch of good psychology research that associates picking money now instead fo more money later with low willpower and thus less earning capaticity.
I’d pick the $1.03, so long as it was in the form of an electronic funds transfer and not more pennies to clutter up my pockets. I guess I probably qualify as a very strange person though?
If you get rid of every possible transaction cost, even implicit costs of the inconvenience of dealing with the transaction and currency, then I would agree that many people would take the $1.03. In fact, I would too. It’s only that these costs are neglected as not being real that I see a problem with. Utility of money just isn’t that simple. For example, some people might actually prefer that the money be handed to them than that it be transferred to their bank account even at the same moment, because if they have found money in-hand, they won’t feel guilty about using it to purchase something “for themselves” rather than paying bills. In fact, someone might prefer $50 handed to them in cash over $55 transferred to and immediately available in their bank account. Is that irrational, or are they just satisfying their utility function in light of their cognitive limits to control their feelings of guilt?
In some ways people want it to be answered in an ideal scenario, as if it’s a physics problem, but I don’t think that’s how most people answer questions like this. Most people read the question, imagine a particular scenario (or set of scenarios, maybe), and answer for that scenario. If you want people to answer in an ideal scenario than the question is underspecified. Also, it’s not clear to me that you can make it an ideal scenario and retain the effect in question, because the more people look at it like a physics problem with a right answer, the less likely they are to answer in a way that’s not in line with their behavior in normal circumstances which you are trying to predict.
I agree with your reasoning. I think it’s sort of silly to suppose that selecting $55 implying a high discount rate is necessarily less rational. If someone offered you $1.00 today or $1.03 tomorrow, it would be a very strange person who decides that they would prefer the $1.03, even though that’s a 4,848,172% rate of return. There are actually disutilities involved in keeping track of future cash inflows, even if small. But almost no one, even the triumphantly rich with very low marginal utilities associated with additional dollars, would prefer $55 million dollars now to $75 million dollars in 60 days. Perhaps drug addicts and the terminally ill would.
Of course, if someone said “Occasionally throughout your life we will surprise you with either $55 dollars, or $75 dollars 60 days later than the days we would have surprised you with $55,” it would then be silly to choose the $55 dollar scenario, because in that case there are no disutilities.
Interestingly, the survey data actually doesn’t seem to support the notion that those with higher incomes are more likely to take the money now. In fact, the data suggest that the wealthiest are slightly less likely to take the money today. For five quintiles, the P($55 now) is 8.4% for <$7,770, 6.2% for <$25K, 6.8% for <$50K, 6.4% for <$83K, and 5.0% for the top quintile. This is with N=593. This doesn’t include any analysis for potentially confounding factors.
I’m puzzled by your use of the word “actually” in the last paragraph. It sounds as if you’re saying you’d expect people with higher incomes to choose less money now over more money later. If so, why? I’d expect the reverse, for multiple reasons (and not only because apparently that’s what the survey shows).
I was thinking that wealthier people would have a lower level of utility associated with the additional marginal dollars they could get from waiting, so transaction costs and other disutilities would override the utility offered by having a greater number of dollars. I said “actually” only because this thinking is sort of in line with what I was discussing in my first paragraph.
I would think that if our hypothetical wealthy person was rich enough to not care all that much about an additional $20 million, they wouldn’t care enough about the initial $55 million to pick the short-term option that netted them less money.
If the utility of the dollars goes down, doesn’t the utility loss from transaction costs also go down? (Because if you care less about the money you can worry less about it. Extreme case: If I offer to give you $0 in a week, you don’t need to waste any time or effort keeping track of when I’m supposed to pay you.)
People get wealthy by prefering money in the feature over getting utility right now.
There a bunch of good psychology research that associates picking money now instead fo more money later with low willpower and thus less earning capaticity.
I’d pick the $1.03, so long as it was in the form of an electronic funds transfer and not more pennies to clutter up my pockets. I guess I probably qualify as a very strange person though?
If you get rid of every possible transaction cost, even implicit costs of the inconvenience of dealing with the transaction and currency, then I would agree that many people would take the $1.03. In fact, I would too. It’s only that these costs are neglected as not being real that I see a problem with. Utility of money just isn’t that simple. For example, some people might actually prefer that the money be handed to them than that it be transferred to their bank account even at the same moment, because if they have found money in-hand, they won’t feel guilty about using it to purchase something “for themselves” rather than paying bills. In fact, someone might prefer $50 handed to them in cash over $55 transferred to and immediately available in their bank account. Is that irrational, or are they just satisfying their utility function in light of their cognitive limits to control their feelings of guilt?
In some ways people want it to be answered in an ideal scenario, as if it’s a physics problem, but I don’t think that’s how most people answer questions like this. Most people read the question, imagine a particular scenario (or set of scenarios, maybe), and answer for that scenario. If you want people to answer in an ideal scenario than the question is underspecified. Also, it’s not clear to me that you can make it an ideal scenario and retain the effect in question, because the more people look at it like a physics problem with a right answer, the less likely they are to answer in a way that’s not in line with their behavior in normal circumstances which you are trying to predict.