Free GMAT Test Questions

Question 1 of 1
ID: GMAT-RC-1
Section: Verbal Reasoning - Reading Comprehension

(Practice Mode: Single selected Question » Back to Overview)

When asked to make an intertemporal choice, a decision that involves a tradeoff between costs and benefits at different points in time, about events in the distal future, most people tend to make the rational choice - the option that leads to a bigger reward. For example, almost everyone would prefer to gain twelve-hundred dollars in eleven years over a thousand dollars in ten years. However, as one or both the time-points involved move closer to the present, people start to prefer the smaller but sooner rewards over the bigger but delayed rewards. Many people would choose to get a thousand dollars today instead of twelve-hundred in a year. To these people, the perceived value of a thousand gained today seems to be greater than that of a twelve-hundred gained a year later. This general tendency to increasingly discount rewards as they move away from "now" and approach a temporal horizon in the future is labelled by behavioral economists as present-bias or temporal discounting.

An individual's discount rate for delayed future outcomes is a measure of his impatience and impulsivity. A person for whom $100 today is as attractive as $1000 in one year has a much higher discount rate - and is more impulsive and has poorer self-control - than a person for whom $100 today is equivalent to $110 in one year. Individuals with high discount rates are less likely to save for their retirement and have a significantly higher credit card debt; though they may desire the rewards that would come from practicing fiscal prudence, those rewards are in the distant future and hence are heavily discounted and appear less attractive than the pleasure obtained by spending money right now.

Marketers use the concept of temporal discounting to encourage impulse-buying with the "buy now, pay later" or "free trial" plans. Such plans entice consumers by focusing on the immediate rewards (the thrill of using a new product) while the costs recede into the future, and thus discounted by the consumers, become less relevant to the buying decision. Marketers also strive to convince consumers that buying a product would boost their public image; belief in such an identity-enhancing effect provides an immediate reward to the customer upon buying the product.

The discounting rate for future rewards or costs varies inversely with age and more favorable social comparisons, and directly with the availability of distracting temptations. The discounting rate can be decreased through vivid visualization of the important future rewards that would come from resisting the small rewards in the present, or of the dire future consequences of indulging in the present temptations. Such visualization brings the future benefits and costs forward to the here and now, and thus enables a person to make a fairer comparison of the intertemporal costs and benefits that would result from his decision.

Sub-Question 1 of 10

The primary purpose of the passage is to

Adiscuss the different factors that affect a phenomenon described by behavioral economists
Bdiscuss the relevance of a phenomenon described by behavioral economists to individual lives and suggest a measure to control it
Cexplain certain marketing practices with a phenomenon described by behavioral economists
Dexplain a phenomenon described by behavioral economists and predict its short-term and long-term consequences
Eidentify the reasons for a phenomenon described by behavioral economists and recommend measures to address it
  •  
  •