VIOLATIONS OF PRESENT-VALUE MAXIMIZATION IN INCOME CHOICE

We report results of an experiment testing for present-value maximizat ion in intertemporal income choice. Two-thirds of subjects did not max imize present value. Through a series of experimental manipulations th at impose costs on non-present value maximizers, we are able to reduce the level of violations substantially. We find, however, that a sizea ble proportion of subjects continue to systematically violate present- value principles. Our interpretation is that these subjects either can not or choose not to distinguish between income and expenditure in mak ing their choices. Self-management, bounded rationality, and sequence preference are suggested as possible explanations for such behavior.