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Jamie

Does it not depend on the method by which the $100/$120 is paid? Someone who values their time is more likely to settle for $100 instantly rather than go out of their way in 3 days' time to pick up an extra $20... once the subject has to go away and come back to pick up money, it makes little difference how long they have to wait so they opt for more. So they're willing to give up $20 to avoid wasting time in the future - would that make sense?

Jamie

What happens if the amounts are increased? I'd bet that more people would be willing to wait three days if they were offered $1000 instantly or $1200 in the future.

Dave Wheeler

I think the "$100 instantly" choice reflects our basic human need to take the "sure thing" vs. waiting 3 days for a potential reward. A lot can happen in 3 days.

On the other hand, if you have to wait 28 days anyways, you may as well wait 31, since from the perspective of the decision point they are relatively the same. (refer to the "Time value of money")

In this example, the "cognitive ruler" analogy fails since it does not capture the full range of choices / options / human assumptions, e.g. that the offer could be withdrawn at any time.

Dave Wheeler

EricTheHalf

Not quite sure how the picture is illustrative of the story.

Nice picture, though, and good story.

Mike Luderitz

Sometimes "A bird in the hand is worth more than two in the bush" is relevant.

Jack

This plays out continuously in finance. A P/E of 20 is a good deal relative to a P/E of 25 (today vs. 2007 ~normalized earnings). But on an absolute level, 20 is "often" precursor to a weaker market.

Ale

@Dave and Mike

I think the experiment assumes that the offer wouldn't be withdrawn, else it wouldn't be a fair experiment.

If you waited 28 days and you wait till the 31th day, you are waiting 3 days more. Which is what people refuse to wait _later on_! The _same people next_ didn't wait 3 days. They didn't wait what they had already waited for the first reward.

Cheers,

jeff monday

Jamie,

The study was done by two Harvard professors, Paul Lawrence and Nitin Nohria, the book did not provide specifics as to how the participants were paid. I have emailed them and if they get back to me I will let you know the answer to your question.

The problem in the $100/$120 example is the irrational behavior exhibited by the participants. The participants were willing to wait 3 days for the extra $20 when the reward was way in the future but not when the reward was only 3 days away (versus 31 days away). It is this inconsistency that proves the relativity trap.

The technical term for this type of behavior is hyperbolic discounting. Check out this wikipedia article:

A great quote from the article: "Subjects using hyperbolic discounting reveal a strong tendency to make choices that are inconsistent over time. In other words, they make choices today that their future self would prefer not to make, despite using the same reasoning. This dynamic inconsistency [3] happens because hyperbolic discounts value future rewards much more than exponential discounting."

If you were to increase the rewards, my guess is that participants would make the same irrational decisions. It is not the size of the rewards that is impacting the outcome, rather it is the hyperbolic discounting that sets the relativity trap.

-jeff

jeff monday

Dave,

I understand your point "that a lot can happen in three days", however the goal of an experiment is to isolate a variable and take a snapshot of the behavior. You can assume the participants trusted the harvard professors to pay out, as they were willing to wait 3 extra days in the 28 day/ 31 day decision.

Regarding the time value of money. The difference between rewards in both decisions is 3 days. There aren't very many (if you have one please pass it on) investment opportunities that yield 20% return on your money in 3 days. If you have a way to make 30% in 3 days then your decision for both instances would be to take the money and invest in your 30% yield opportunity.

The relativity trap is proven by the fact that participants made inconsistent decisions. If they had established a cognitive ruler to assess the situation, they could have avoided the relativity trap and maximized their reward given their investment opportunities:

- Access to investment that yields >20% in 3 days -->> take $100 now and invest it.

- Access to investment that yields > wait 3 extra days and take the $120.

- jeff

Ram

I am not sure if we are comparing apples to apples when we are comparing the outcomes for two situations involving 3 days later. Would like to point to a paper in Econometrica,76(3), May 2008, 583-618, titled:
"Eliciting risk and time preferences" where they tackle the issue.

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