Predicting the Discount Rate of Multiple Future Payouts

Abstract

Present equivalents of future payouts elicited from individuals exhibit a high variability in the underlying discount rate, suggesting that multiple factors influence discounting. One such factor --- shown to be robust --- is the magnitude effect, whereby small future payouts are discounted more than larger ones. When individuals are confronted with more than one future payout, it is unknown whether the magnitude effect is driven by the sum of cash flows, or the highest cash flow, or the first, or the last, or the lowest. In this paper, we elicit the discount rate of diverse cash flows following a ceteris paribus design. The best predictive model has the discount rate decreasing with the sum and the highest cash flow, with noticeable effects kicking in for sums below 600 euros and/or the maximum cash flow below 18 euros. We also take decreasing impatience into account, and distill a prescriptive base discount rate after removing the effects of magnitude and decreasing impatience. We illustrate the approach with applications to energy conserving decisions.

Keywords: discounting, time preferences, magnitude effect, decreasing impatience, energy saving