Does Source of Income Affect Risk and Intertemporal Choices?

Hans Krogh Hvide, Jae Ho Lee

Research output: Working paperDiscussion paper

11 Downloads (Pure)

Abstract

Economic theory predicts that consumption and investment choices should not depend on the source of the budget. We test this assumption through conducting two experiments. In both experiments, we divide participants into two groups: those that obtain an endowment through a windfall and those that obtain the same amount through completing a physical effort task. We show that individuals in the hard-earned group make significantly less risky and more patient choices than individuals in the windfall group. We corrobate the existence of source-dependent decision rules through surveying a large and representative sample of individuals. Our findings are consistent with versions of mental accounting theory where mental accounts are linked to source of income. We conclude that consumption and investment behavior are source-dependent, unlike what is assumed by economic theory.
Original languageEnglish
PublisherUniversity of Aberdeen Business School
Number of pages40
Publication statusPublished - Aug 2015

Publication series

NameDiscussion Paper in Economics
PublisherUniversity of Aberdeen
No.6
Volume15
ISSN (Electronic)0143-4543

Fingerprint

Income
Intertemporal choice
Windfall
Experiment
Economic theory
Decision rules
Investment choice
Accounting theory
Consumption behavior
Mental accounting
Mental accounts
Endowments
Investment behavior
Patient choice

Keywords

  • house money
  • risk preferences
  • time preferences
  • windfall gain

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

Cite this

Hvide, H. K., & Lee, J. H. (2015). Does Source of Income Affect Risk and Intertemporal Choices? (Discussion Paper in Economics; Vol. 15, No. 6). University of Aberdeen Business School.

Does Source of Income Affect Risk and Intertemporal Choices? / Hvide, Hans Krogh; Lee, Jae Ho.

University of Aberdeen Business School, 2015. (Discussion Paper in Economics; Vol. 15, No. 6).

Research output: Working paperDiscussion paper

Hvide, HK & Lee, JH 2015 'Does Source of Income Affect Risk and Intertemporal Choices?' Discussion Paper in Economics, no. 6, vol. 15, University of Aberdeen Business School.
Hvide HK, Lee JH. Does Source of Income Affect Risk and Intertemporal Choices? University of Aberdeen Business School. 2015 Aug. (Discussion Paper in Economics; 6).
Hvide, Hans Krogh ; Lee, Jae Ho. / Does Source of Income Affect Risk and Intertemporal Choices?. University of Aberdeen Business School, 2015. (Discussion Paper in Economics; 6).
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