A robust phenomenon in intertemporal decisions—the magnitude effect—holds that people discount small financial gains at a higher rate than large ones. However, the psychological underpinnings of this effect are not yet fully understood. A psychological explanation of the magnitude effect proposes that intertemporal choices are driven by comparisons of features of the present and future choice options (e.g., information on rewards). According to this explanation, the hypothesis is that the magnitude effect is stronger when the absolute difference between present and future rewards is emphasized, compared to when their relative difference is emphasized. The test for this hypothesis has been limited to decision tasks using only one elicitation method (the two-choice paradigm) and positive rewards (gains). This prompts the question of whether support for the hypothesis, as derived from the psychological explanation above, can be generalized to settings that trigger inherently different psychological processes, such as different elicitation methods and in the domain of losses. To address this question, we conducted experiments using the preference-matching method whereby the premium amounts were framed in terms of either currencies (emphasizing absolute differences) or percentages (emphasizing relative differences). We thus tested the robustness of the evidence in support of the hypothesis that percent framing, relative to currency framing, attenuates the magnitude effect in the domain of gains (Studies 1 and 2) and that of losses (Study 1). Overall, the results support the hypothesis.
|Publication status||Submitted - 2020|