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.
|Name||Discussion Paper in Economics|
|Publisher||University of Aberdeen|
- house money
- risk preferences
- time preferences
- windfall gain