Peanuts effect in intertemporal decision-making processes.

Abstract

The intertemporal choice refers to the individual decision-making process when analyzing the preferences between two rewards with different due dates. That is to say, it aims to analyze the preferences between two rewards (x1,t1) and (x2,t2) , where x1 smaller than x2 and t1 smaller than t2 (Cruz et al., 2016). Traditionally, the financial model used to describe the individual behavior is the discounted utility model (Samuelson, 1937). This is based on the exponential discounting which assumes that decisions are taken in a rational and consistent way. However, subsequent empirical studies conclude that the discounted utility model must be corrected by the so-called “anomalies in intertemporal choice” in order to properly describe the individual behavior. Some of the well-known anomalies are interval effect, magnitude effect, sign effect, sequence effect and dissemination effect.
Nevertheless, an important anomaly which until now has not been studied in depth and which deserves special consideration is the so-called peanuts effect. This anomaly considers that risk aversion increases for large rewards, with individuals more willing to take greater risks when the involved amount is lower (Weber and Chapman, 2005).
The propensity for risky decisions involving a small reward is partly explained by the fact that the anticipation of the negative emotion of deception is less than when the expected reward is greater. In this way, the decision-maker exhibits more risk propensity for small and/or unlikely rewards because the negative emotion derived from a negative result is smaller. This work presents an analysis of the peanuts effect through a review of the literature as well as its mathematical treatment.
The present work has been financed by the project: “La Sostenibilidad del Sistema Nacional de Salud: Reformas, Estrategias y Propuestas” (reference: DER2016-76053-R).