Prague Economic Papers 2022, 31(3):259-275 | DOI: 10.18267/j.pep.805
How Important is the Time Value of Money in Decision Making? Results of an Experiment
- Department of Finance and CEFIMO, Bucharest University of Economic Studies, Bucharest, Romania
This paper tests how important the time value of money (TVM) principle is in decision making in real-life conditions, when different selection criteria can be considered. A three-stage survey was administered to students from a Romanian university of economics. They were asked to choose between two cars. These cars have equal total cash outflows but different present values. The benefits from using them were not specified, thus inducing a model ambiguity: respondents may consider only cash flows, but they can consider other benefits, too. It was tested whether the answers remain stable when supplementary information is provided. The respondents explained their motivations. Probit regressions were used to explain the preferences for applying or not applying TVM, for switching from one answer to another, and for converging to a response compatible with a preference for TVM. TVM was not the main selection criterion. Financial education had no impact on the opinion.
Keywords: Time value of money, decision making, utility, model ambiguity
JEL classification: G31
Received: December 5, 2021; Revised: April 12, 2022; Accepted: May 6, 2022; Published: September 22, 2022 Show citation
References
- Adam, A. M., Boadu, M. O., Frimpong, S. (2018). Does gender disparity in financial literacy still persist after retirement? Evidence from Ghana. International Journal of Social Economics, 45(1), 18-28, https://doi.org/10.1108/IJSE-06-2016-0159
Go to original source...
- Baur, D., Lagoarde-Segot, T. (2016). The Contradiction between the Time Value of Money and Sustainability. In: Alijani, S., Karyotis, C. Finance and Economy for Society: Integrating Sustainability (Critical Studies on Corporate Responsibility, Governance and Sustainability, Vol. 11, 75-92. Bingley: Emerald Group Publishing Limited. ISBN 978-1786355102.
Go to original source...
- Böhm-Bawerk, E. (1930). The Positive Theory of Capital. New York: G. E. Stechert.
- Botha, A., Beyers, C., de Villiers, P. (2021). Simulation-based optimisation of the timing of loan recovery across different portfolios. Expert Systems with Applications, 177(9), 114878, https://doi.org/10.1016/j.eswa.2021.114878
Go to original source...
- Breeden, D. (1979). An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities. Journal of Financial Economics, 7(3), 265-296, https://doi.org/10.1016/0304-405X(79)90016-3
Go to original source...
- Chhillar, N., Arora, S. (2021). Financial Awareness among Women in Delhi NCR: A Comparative Study. Pacific Business Review International, 14(2), 147-158.
- Christelis, D., Georgarakos, D., Jappelli, T., et al. (2021). Heterogeneous wealth effects. European Economic Review, 137(8), 103805, https://doi.org/10.1016/j.euroecorev.2021.103805
Go to original source...
- Dragotă, V., Obreja Brașoveanu, L., Dragotă, I. M. (2012). Management financiar. Diagnosticul financiar al companiei. 2nd edition. Bucharest: Ed. Economică. ISBN 978-973-709-614-2.
- Esfandiar, K., Sharifi-Tehrani, M., Pratt, S., et al. (2019). Understanding entrepreneurial intentions: A developed integrated structural model approach. Journal of Business Research, 94(1), 172-182, https:/doi.org/10.1016/j.jbusres.2017.10.045
Go to original source...
- Eyerci, C. (2022). The approach of Islamic economists to the prohibition of interest in the context of Bohm-Bawerk's time preference theory of interest. International Journal of Islamic and Middle Eastern Finance and Management, 15(1), 18-31, https://doi.org/10.1108/IMEFM-05-2020-0202
Go to original source...
- Fernandes, D., Lynch, J. G., Netemeyer, R. G. (2014). Financial Literacy, Financial Education, and Downstream Financial Behaviors. Management Science, 60(8), 1861-1883, https://doi.org/10.1287/mnsc.2013.1849
Go to original source...
- Fisher, I. (1930). The Theory of Interest. New York: The Macmillan Company.
- Frederick, S., Loewenstein, G., O'Donoghue, T. (2002). Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature, 40(2), 351-401, https://doi.org/10.1257/002205102320161311
Go to original source...
- Frydman, R., Mangee, N., Stillwagon, J. (2020). How Market Sentiment Drives Forecasts of Stock Returns. Journal of Behavioral Finance, 22(4), 351-367, https://doi.org/10.1080/15427560.2020.1774769
Go to original source...
- Graham, J. R., Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243, https://doi.org/10.1016/S0304-405X(01)00044-7
Go to original source...
- Hansen, L. P., Sargent, T. J. (2021). Macroeconomic uncertainty prices when beliefs are tenuous. Journal of Econometrics, 223(1), 222-250, https://doi.org/10.1016/j.jeconom.2019.11.010
Go to original source...
- Hibbert, A. M., Lawrence, E. R., Prakash, A. J. (2012). The Role of Financial Education in the Management of Retirement Savings. Journal of Behavioral Finance, 13(4), 299-307, https://doi.org/10.1080/15427560.2012.735727
Go to original source...
- Janáček, J., Rybáček, V. (2020). Commuting Time and Life Satisfaction of High School Students in the Czech Republic, Italy and Slovenia. Prague Economic Papers, 29(5), 561-574, https://doi.org/10.18267/j.pep.744
Go to original source...
- Junger, M., Mietzner, M. (2020). Banking goes digital: The adoption of FinTech services by German households. Finance Research Letters, 34(5), 101260, https://doi.org/10.1016/j.frl.2019.08.008
Go to original source...
- Kahneman, D., Thaler, R. H. (2006). Anomalies: Utility Maximization and Experienced Utility. The Journal of Economic Perspectives, 20(1), 221-234, https://doi.org/10.1257/ 089533006776526076
Go to original source...
- Lucas, R. E. (1978). Asset Prices in an Exchange Economy. Econometrica, 46(6), 1429-1445, https://doi.org/10.2307/1913837
Go to original source...
- McCannon, B. C., Peterson, J. (2015). Born for Finance? Experimental Evidence of the Impact of Finance Education. Journal of Behavioral Finance, 16(3), 199-205, https://doi.org/10.1080/15427560.2015.1064933
Go to original source...
- Paraboni, A. L., da Costa, N. (2021). Improving the level of financial literacy and the influence of the cognitive ability in this process. Journal of Behavioral and Experimental Economics, 90(2), 101656, https://doi.org/10.1016/j.socec.2020.101656
Go to original source...
- Pflug, G., Wozabal, D. (2007). Ambiguity in portfolio selection. Quantitative Finance, 7(4), 435-442, https://doi.org/10.1080/14697680701455410
Go to original source...
- Rubinstein, M. (1976). The Valuation of Uncertain Income Streams and the Pricing of Options. Bell Journal of Economics, 7(2), 407-425, https://doi.org/10.2307/3003264
Go to original source...
- Sahi, S. K., Arora, A. P., Dhameja, N. (2013). An Exploratory Inquiry into the Psychological Biases in Financial Investment Behavior. Journal of Behavioral Finance, 14(2), 94-103, https://doi.org/10.1080/15427560.2013.790387
Go to original source...
- Samuelson, P. (1937). A Note on Measurement of Utility. Review of Economic Studies, 4(2), 155-161.
Go to original source...
- Shiv, B., Carmon, Z., Ariely, D. (2005). Placebo Effects of Marketing Actions: Consumers May Get What They Pay For. Journal of Marketing Research, 42(4), 383-393, https://doi.org/10.1509/jmkr.2005.42.4.383
Go to original source...
- Skagerlund, K., Lind, T., Strömbäck, C., et al. (2018). Financial literacy and the role of numeracy - How individuals' attitude and affinity with numbers influence financial literacy. Journal of Behavioral and Experimental Economics, 74(6), 18-25, https://doi.org/10.1016/j.socec.2018.03.004
Go to original source...
- Urban, C., Schmeiser, M. Collins, J. M., et al. (2020). The effects of high school personal financial education policies on financial behavior. Economics of Education Review, 78(10), 101786, https://doi.org/10.1016/j.econedurev.2018.03.006
Go to original source...
- Van Rooij, M., Lusardi, A., Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 10(2), 449-472, https://doi.org/10.1016/j.jfineco.2011.03.006
Go to original source...
- Wolinsky, A. (1983). Prices as Signals of Product Quality. The Review of Economic Studies, 50(4), 647-658, https://doi.org/10.2307/2297767
Go to original source...
This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.