How Good is the Exponential Function Discounting Formula?: An Experimental Study

This paper estimates the degree of the exponential-function misvaluation, its variation with given product price level, and its expected growth rate. The paper examines whether other mathematical functions, such as linear, quadratic and cubic functions, conform to the discounting and compounding processes of individual decision makers. Using subjects familiar with the exponential function discounting formula, this study finds that individuals undervalue the compound interest discounting formula given by the exponential function and overvalue the simple interest discounting formula given by the linear function. These findings can be attributed to the overreaction, overconfidence, mental accounting and narrow-framing behaviors discussed in psychology.