Date of Original Version

2-1988

Type

Article

Abstract or Description

Recent research has demonstrated that choices between gambles are systematically influenced by the way they are expressed. Kahneman and Tversky's Prospect Theory (1979) explains many of these "framing" effects as shifts in the point of reference from which prospects are evaluated. This paper demonstrates the applicability of the reference point concept to intertemporal choice. Three experiments demonstrate that when people choose between immediate and delayed consumption, the reference point used to evaluate alternatives can significantly influence choice. The first study elicited relative preference for immediate and delayed consumption using three methods, each of which differently framed choices between alternatives offering identical end-state consumption. The conventional discounted utility model predicts that the three methods of elicitation should yield similar estimates of time preference, but preferences were found to differ in accordance with a reference point model. The second and third studies extend and replicate the results from the first, the third using real rather than hypothetical choices.

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Published In

Management Science, 34, 200-214.