Friday, January 30, 2009

Exposure to innocent victims increases discounting

A study by Mitchell Callan and colleagues from the latest issue of the Journal of Experimental Social Psychology shows that watching a video depicting the suffering of an innocent vs. a non-innocent victim increased discounting across six time delays. The authors reasoned that forming a "personal contract" to take a larger sum at a later date rather than a smaller sum now may be perceived as a bad idea in an unjust world where investments may not pay off.

Looking through the lens of the recession, rife with innocent victims, you wonder to what extent economic instability leads to more impulsive choices. When Ryanair's CEO Michael O'Leary swept in to secure huge discounts on Boeing 737-800's in the wake of 9/11, he was clearly capitalising on what he had the vision to recognise would be a passing scare. Though the current crisis appears far from transient it would be worth documenting its effects on economic decision-making. Loss-aversion may increase and though people are certainly saving money in the event of a shock, trade-off's should increase between wanting access to money now vs more money at a fixed time far into the future.

1 comment:

Liam Delaney said...

also of interest is the reference groups that people will use when looking at their position during a recession. For example, a ten per cent pay cut in real terms is bad because it lowers your absolute income and creates a negative reference effect with respect to previous income.

Also, it may put you below some peers who have not taken a similar income cut. However if your reference group is people who have lost their job or you are using the counterfactual where you lose your job as the reference group then things may not feel so bad.

the issue of loss aversion that michael raises does really depend on this issue of a reference group. Losing ten per cent pay may not generate the type of steep utility drop predicted by prospect theory if people's expectations have been substantially dampened.