O’Donoghue and Rabin Again, This Time, “Incentives and Self-Control” (2006)

Ted O’Donoghue and Matthew Rabin, “Incentives and Self Control.” In Richard Blundell, Whitney Newey, and Torsten Persson, eds., Advances in Economics and Econometrics: Volume 2: Theory and Applications (Ninth World Congress), Cambridge University Press, 2006, pp. 215-245 [pdf of pre-publication version here].

• Present biased people might gain through commitment, such as commitments to study or to exercise. Heterogeneity among individuals and uncertain future costs and opportunities, necessitate some flexibility in plans.

• The case against exponential discounting is similar to the case against expected utility theory: a slight bias for today versus next week, which seems perfectly reasonable, implies ridiculous decisions at longer time frames for exponential discounters. 

• Sophisticates can predict their own future self-control problems whereas naïfs are (blissfully?) unaware.

• People do not use the same discount rate for all decisions; they both plan for the long-term and give way to short-term indulgence. They hold both savings and credit card balances.

• You can alter incentives to influence present-biased folks without affecting exponential discounters. You can manipulate defaults, as with Save More Tomorrow, or mandate active choice.

• If the choice is to quit a habit now or later, many people will postpone their quitting, but if the choice is now or never, they will quit now. Naïfs don’t choose an addicted life course – they just choose one more day of addiction, again and again and again.