Subjective perception of time and decision inconsistency in interval effect

Abstract

AbstractThe interval effect refers to the phenomenon in which the discount rate decreases as the interval considered increases. It represents one of the many anomalies of the decision-making process in the context of intertemporal choices. This paper suggests that the latter anomaly is due to the perceived time and emotional drives involved in the moment of choice and their interaction. The study is developed through a direct comparison between empirical preferences and those predicted by the normative model, respectively determined by proper time, i.e., empirical time and normative time, which are different from objective time. Although it was known in the literature that the perception of time has a substantial impact on preferences and the phenomenon of temporal inconsistency, our study presents a measure that quantifies the decision-making bias caused by the subjective perception of time and contributes to the normalisation of choices defined as irrational. By the term normalisation, we mean to clarify the extent to which the cognitive structures of the decision-maker respect the principles of economic rationality. From an operational point of view, the present work's originality lies in proving that the same description of subjective time is not constant in the context of the interval effect. The experimental implementation provides empirical evidence of the latter considerations. The contribution of this work refers mainly to the field of behavioural finance as it aims to describe anomalies as inevitable consequences of individual cognitive processes.