Hardisty, Appelt, and Weber (2013), on Magnitude Effects in Intertemporal Choice

David J. Hardisty, Kirstin C. Appelt, and Elke U. Weber, “Good or Bad, We Want it Now: Fixed-cost Present Bias for Gains and Losses Explains Magnitude Asymmetries in Intertemporal Choice.” Journal of Behavioral Decision Making 26: 348–361, 2013.

• A positive discount rate means that you want to capture gains immediately, and postpone losses as long as possible. Why would people have a positive discount rate? (1) opportunity cost; (2) uncertainty (for instance, you might not actually have to pay that cost if it is postponed); (3) resource slack, the belief that your budget won’t be as tight in the future; and (4) preferences themselves display present bias, or impatience. 

• The magnitude effect: people discount future small gains much more highly than they discount substantial sums. This will be the case, for instance, if preferences have a sort of fixed cost present bias. People might be willing to pay $4, for instance, to achieve an immediate reward rather than wait for a larger, later reward. This fixed cost will induce people to move to take small gains immediately, but for larger amounts (which involve larger future gains, too), they are willing to wait. 

• In the loss domain, there is evidence for small or even reverse magnitude effects: small losses are discounted less than large losses. A fixed cost present bias explains observed magnitude effects for gains, but does not predict asymmetric magnitude effects. People with a fixed cost present bias would still want to postpone losses, contrary to some empirical evidence. 

• Hardisty, Appelt, and Weber argue that people want to resolve uncertainty right away, now. Such resolution is not their only concern, but all else equal, it means that gains are taken right away and that losses are realized right away. Further, this resolution bias is insensitive to magnitude, while the other factors, such as uncertainty and opportunity costs, tend to scale with magnitude. As a result, the resolution bias yields greater discount rates for gains and smaller ones for losses. Further, small losses will involve negative discounting. In the experiments, zero and negative discount rates are common in the small loss condition.