The improving sequence effect on monetary sequences

Adriana Garcia; María José Muñoz Torrecillas; Salvador Cruz Rambaud

doi:10.1016/j.heliyon.2020.e05643

The improving sequence effect on monetary sequences

Heliyon. 2020 Dec 4;6(12):e05643. doi: 10.1016/j.heliyon.2020.e05643. eCollection 2020 Dec.

Authors

Adriana Garcia¹, María José Muñoz Torrecillas², Salvador Cruz Rambaud²

Affiliations

¹ Department of Economics, Econometrics and Finance, University of Groningen, the Netherlands.
² Department of Economics and Business, Universidad de Almería, Spain.

Abstract

Experimental studies reveal a preference for improving income sequences, challenging the axioms of the discounted utility model, such as the present value maximization principle. Through an experiment, we test the existence of this anomaly on short and long-term income sequences, by confirming previous experimental evidence. Although the participants are aware of the present value maximization, they select improving sequences of income mainly to cover their future spending needs, to feel motivation at work, and to receive a signal of success and status. In order to include this sequence effect in a mathematical valuation model, we propose an alternative model to value sequences which outperforms the traditional discounting model by fitting the present value with the preferences of the participants.

Keywords: Behavioral economics; Decision sciences; Financial economics; Improving sequence effect; Income sequence; Intertemporal choice; Labor economics; Present value maximization principle; Social sciences; Valuation model.