What is it about?
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. TVM was not the main selection criterion. This result is questioning if, in real life decision-making, financial principles are really applied.
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Why is it important?
This study finds that, at least among the respondents, TVM was not considered the main criterion in decision making. Furthermore, providing more information about the discounting process did not lead to a significant change in opinions. Other attributes (such as preference for more expensive products as a proxy for better quality, maybe determining higher perceived utility) seem to have counted more. Financial education (measured by the number of years since the first finance course attended, and dividing the sample into bachelor and master students) had no significant effect on preferring TVM. However, when supplementary information (financial indicators) was provided, some subjects changed their opinion, converging to a preference for TVM. However, per the overall population, the respondents can be segmented into two main stable groups: the ones who consequently apply TVM and the ones who do not apply it.
Perspectives
The results may be useful for a better understanding of decision makers when more (contradictory) criteria can be considered. Even if TVM is accepted by some decision makers, it seems to count less for others. From a theoretical perspective, greater concern for modelling the utility function of deciders may be salutary. For practitioners, a discussion with clients to better understand their objectives can also be useful. A possible application can be in appraising some investment projects that involve financial and non-financial dimensions (e.g., a financial perspective, modelled through NPV, but also a socially responsible one).
Victor Dragota
Academia de Studii Economice din Bucuresti
Read the Original
This page is a summary of: How Important is the Time Value of Money in Decision Making? Results of an Experiment, Prague Economic Papers, September 2022, University of Economics,
DOI: 10.18267/j.pep.805.
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