2011 Theses Doctoral

Temporal Discounting of Losses

Hardisty, David J.

This dissertation presents a series of five papers to better understand how to measure discounting, how and why discounting of losses differs from discounting of gains, and how to apply research on discounting to public policy. Paper 1 compares two common methods of measuring discounting - titration and matching - with a dynamic "multiple staircase" method adapted from psychophysics. Paper 2 examines the robustness of the sign effect across financial, environmental, and health domains. Paper 3 explores the interaction of sign and magnitude, and offers an explanation for why losses reverse or eliminate the magnitude effect. Paper 4 investigates an explanation for the sign effect: that dread looms larger than pleasurable anticipation, and Paper 5 offers an integrative approach to intertemporal choice, with recommendations for environmental policy. Taken together, these investigations suggest that discounting of losses is both quantitatively and qualitatively different from discounting of gains. Across domains and methods losses are discounted much less than gains and losses eliminate (or reverse) the magnitude effect. These behavioral differences occur because "dread" of losses is more pronounced than pleasurable anticipation of gains. In other words, people dislike having losses hanging over their heads more than they enjoy looking forward to positive events. For this reason, while people almost universally want to have gains immediately (due to impatience and other reasons), people are divided about losses - sometimes preferring to realize them immediately, and sometimes preferring to postpone them. Theories and policies involving intertemporal choice must distinguish between losses and gains if they hope to accurately describe and predict people's choices.