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Interest and inflation rates may be major determinants of delay discounting, but these variables have not been controlled in past experiments because they depend on macroeconomic conditions. This study uses a computer game-like task to investigate the effects of inflation rates on people's subjective valuation of delayed rewards. During the task, participants saved virtual money, received interest, and bought items under inflation and interest rate conditions controlled by the experimenter. The subjective values participants placed on delayed rewards were measured during choice periods, after participants learned of item price changes and expected interest earnings. In 2 of 3 experiments, the effects of inflation rates were investigated when the nominal interest rate (Experiment 1) or the real interest rate (Experiment 3) was constant across the 3 experimental conditions (inflationary, zero-inflationary, and deflationary). The effect of nominal interest rates under the deflationary condition was also investigated (Experiment 2). The results suggest that inflation and interest rates affect participants' subjective discounting of delayed rewards.
(ProQuest Information and Learning: ... denotes formulae omitted.)
Humans regard a delayed future reward as less valuable than an immediate reward if the amount of the reward is the same. The present value of a future reward is discounted in proportion to the length of time before the reward is received. Previous studies of delay discounting (Loewenstein & Prelec, 1992; Mazur, 1987; Rachlin, Raineri, & Cross, 1991) have shown that the preference between delayed and immediate rewards is well described either by the following hyperbolic function:
... (1)
in which V is the present discounted value of the delayed reward, A is the amount of the delayed reward, D is the length of the delay, and k is the discount rate.
However, normative economic models assume that future value is discounted exponentially as length of delay increases, as follows:
... (2)
The exponential model applies to the discounting of delayed rewards such as those provided by bank accounts. The amount of savings in a bank account increases through the compounding of a fixed interest rate over time. For example, if you save $100 in a bank account at a 10% rate of interest for 10 years, you will receive $259 in 10 years; that is to say, the present value of $259 that...