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Discounting and the Portfolio of Desires

Psychological Review
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  • Arizona State University Tempe
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Abstract

The additive utility theory of discounting is extended to probability and commodity discounting. Because the utility of a good and the disutility of its delay combine additively, increases in the utility of a good offset the disutility of its delay: Increasing the former slows the apparent discount even with the latter, time-disutility, remaining invariant, giving the magnitude effect. Conjoint measurement showed the subjective value of money to be a logarithmic function of its amount, and subjective probability—the probability weighting function—to be Prelec’s (1998). This general theory of discounting (GTD) explains why large amounts are probability discounted more quickly, giving the negative magnitude effect. Whatever enhances the value of a delayed asset, such as its ability to satisfy diverse desires, offsets its delay and reduces discounting. Money’s liquidity permits optimization of the portfolio of desired goods, providing added value that accounts for its shallow temporal discount gradient. GTD predicts diversification effects for delay but none for probability discounting. Operations such as episodic future thinking that increase the larder of potential expenditures—the portfolio of desirable goods—increase the value of the asset, flattening the discount gradient. States that decrease the larder, such as stress, depression, and overweening focus on a single substance like a drug, constrict the portfolio, decreasing its utility and thereby steepening the gradient. GTD provides a unified account of delay, probability, and cross-commodity discounting. It explains the effects of motivational states, dispositions, and cognitive manipulations on discount gradients.
Discounting and the Portfolio of Desires
Peter R. Killeen
Department of Psychology, Arizona State University
The additive utility theory of discounting is extended to probability and commodity discounting. Because
the utility of a good and the disutility of its delay combine additively, increases in the utility of a good offset
the disutility of its delay: Increasing the former slows the apparent discount even with the latter, time-
disutility, remaining invariant, giving the magnitude effect. Conjoint measurement showed the subjective
value of money to be a logarithmic function of its amount, and subjective probabilitythe probability
weighting functionto be Prelecs (1998). This general theory of discounting (GTD) explains why large
amounts are probability discounted more quickly, giving the negative magnitude effect. Whatever enhances
the value of a delayed asset, such as its ability to satisfy diverse desires, offsets its delay and reduces
discounting. Moneys liquidity permits optimization of the portfolio of desired goods, providing added
value that accounts for its shallow temporal discount gradient. GTD predicts diversication effects for delay
but none for probability discounting. Operations such as episodic future thinking that increase the larder of
potential expendituresthe portfolio of desirable goodsincrease the value of the asset, attening the
discount gradient. States that decrease the larder, such as stress, depression, and overweening focus on a
single substance like a drug, constrict the portfolio, decreasing its utility and thereby steepening the gradient.
GTD provides a unied account of delay, probability, and cross-commodity discounting. It explains the
effects of motivational states, dispositions, and cognitive manipulations on discount gradients.
Keywords: additive utility theory, general theory of discounting, probability and delay discounting,
portfolio diversication, liquidity
When the receipt of a good is delayed money is discounted much
more gradually than other goods such as food, entertainment,
alcohol, drugs, sex, and so forth. But when the receipt of money
is probabilistic, it is discounted at about the same rate as other
goods. These are just two of the many perplexities in the extensive
discounting literature. Another layer of complexity is that large
magnitudes are discounted over delays in their receipt more slowly
than small onesthe positive magnitude effectbut are discounted
more quickly in probability discountingthe negative magnitude
effect. Figure 1, after Estle et al. (2007), offers a paradigmatic
representation of these central issues. Their experimental procedure,
typical of discounting tasks, was:
Participants were told that on each trial, two amounts of a hypothetical
reward (money, beer, candy, or soda) would appear on the screen. For
the temporal-discounting task, they were instructed that one amount
could be received right now, whereas the other amount could be
received after some specied period of time. For the probability-
discounting task, they were instructed that one amount could be
received for sure, whereas the other amount could be received with
some specied probability. (p. 59)
After being asked to choose, the immediate or sure thing was
adjusted to achieve indifference between it and the delayed or
probabilistic one. The relative discount, the value of the immediate
sure thing divided by the value of the delayed or probabilistic one, is
then plotted as a discount function (e.g., Figure 1).
Why are money delay functions shallower than commodity
functions, why are there magnitude effects, and why are those for
delay and probability discordant? This article resolves these
questions with an existing theoretical model (additive utility theory
[AUT]; Killeen, 2009,2023). AUT is then extended to probability
discounting and to the many interesting effects of cognitive and
emotional manipulations and demographic correlates on the rate of
delay discounting, and why these variables play the roles that they
do. To set the stage, it is necessary to reconstruct the AUT of delay
discounting, as it forms the necessary foundation for this solution.
A General Frame
The utility of a package of goods, U(G), is given by some
concatenation of the variables considered in this article:
UðGa,d,p,nÞ=F½faðaÞ,fdðdÞ,fpðpÞ,fnðnÞ:(1)
Here, ais its amount, dis the delay of its receipt, pis the
probability of receiving it, and nis the diversication it affords.
The functions within the brackets, f
x
, are psychophysical value
functions (Stevens, 1986/1975), transforming the numbers on
which they operate into their psychological counterparts. F[]
concatenates those attributes and converts that combination into
the quantity on the left-hand side (lhs), the utility of the package.
This utility adds to that of the existing portfolio of goods, which
constitutes their reference level (Thaler, 1999). For the experiments
covered in this article, it is not necessary to determine the form of
the utility transformation F.
This document is copyrighted by the American Psychological Association or one of its allied publishers.
This article is intended solely for the personal use of the individual user and is not to be disseminated broadly.
This article was published Online First September 14, 2023.
Peter R. Killeen https://orcid.org/0000-0002-0889-4040
The author thanks Junyi Dai and Jonathan Friedel for their most helpful
comments on earlier drafts.
Correspondence concerning this article should be addressed to Peter R.
Killeen, Department of Psychology, Arizona State University, 405 Marcus
Drive, Prescott, AZ 86303, United States. Email: killeen@asu.edu
Psychological Review
© 2023 American Psychological Association 2023, Vol. 130, No. 5, 13101325
ISSN: 0033-295X https://doi.org/10.1037/rev0000447
1310
... delay discounting was indexed in multiple ways including fitting a hyperbolic and an exponential function to the indifference points. The hyperbolic equation, and variants of this equation family, has been suggested as a conceptually more attractive way to describe delay discounting than the exponential function, though that is a discussion beyond the scope of this manuscript.[76][77][78] Because the appropriate summary measures for delay discounting is not settled science, the area under the indifference points (AUC) was calculated. ...
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... This finding may underlie the lack of amount-dependent discounting in many studies with nonhumans, as testing most often does not include the two delayed amounts in the same context (Grace et al., 2012; but see Holt & Wolf, 2019). Killeen's (2023) extension of the Additive Utility Theory (AUT; Killeen, 2009) offers an account of the magnitude effect. In Killeen's Equation 6, the rate constant λ is divided by the amount of the delayed outcome, which results directly in an amount effect, without parameter adjustment. ...
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... Equation 7 has another family line in Killeen's (2009Killeen's ( , 2023b additive utility theory of delay discounting. In it, the disutility of the delay, (kd) s , is subtracted from the utility of the delayed amount a α , (rather than multiplying it, as in all of the above models), yielding Equation 8: ...
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... How to cite this article: Killeen, P. R. (2023). From data through discount rates to the area under the curve. ...
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