Saturday, June 11, 2016

O’Donoghue and Rabin (2015) on Present Bias

Ted O’Donoghue and Matthew Rabin, “Present Bias: Lessons Learned and To Be Learned.” American Economic Review 105(5): 273–279, 2015 [pdf].

• In extending the standard exponential discounting model to incorporate present bias, the β, δ functional form has proven to be “useful, tractable, and (importantly) disciplined [p. 273].” Further, the β, δ approach seems to correlate well with the psychological findings, in that most of the action in terms of changing discount rates over time concerns right now versus the future. [For more on the quasi-hyperbolic, β, δ approach, see this Behavioral Economics Outlines post.] 

• If β is less than 1, and hence the individual displays present bias, we still need to inquire as to whether the person comprehends that she is present biased. A person who fully understands her taste for instantaneous gratification is termed “sophisticated,” whereas someone who fails to understand her present bias – she repeatedly says, and believes, that she will quit smoking tomorrow – is said to be “naïve.” People who recognize that they are present biased but underestimate the extent of their bias are partially sophisticated or partially naïve. 

• Without uncertainty or liquidity constraints, choices among monetary streams should be made by maximizing present value at market interest rates: individual preferences and discount rates are irrelevant. In low-stakes experiments, people are unlikely to be liquidity constrained; therefore, those choices should not depend on discounting. For this reason, recent experiments exploring present bias try to use real effort flows, not monetary streams. 

• Pairs of decisions, such as those involving credit card borrowing along with those involving retirement savings, can inform the calibration of present bias. The idea is that credit card purchases are influenced by present bias, whereas retirement decisions reflect long-run (β=1) preferences. 

• Welfare assessments are possible despite the non-unitary (over time) actors that present bias reflects; long run (that is, β=1) preferences have much to recommend them as the welfare criterion [example here]. 

• Don’t rush to “explain” heterogeneous behavior by different degrees of present bias. Habit persistence or tastes for tobacco probably explain more variance in smoking than does different degrees of present bias, for instance.

Monday, June 6, 2016

Dickson, Jennings, and Koop (2016) on Domestic Violence and Glaswegian Football

Alex Dickson, Colin Jennings, and Gary Koop, “Domestic Violence and Football in Glasgow: Are Reference Points Relevant?” Oxford Bulletin of Economics and Statistics 78(1): 1-21, 2016 (pdf).

• Football matches can provide emotional cues that might spur domestic violence; in particular, an unexpected loss might lead to more violent incidents. Such was the finding from a 2011 article that examined some American football games, where betting odds provided the reference point for outcome expectations. 

• Dickson, Jennings, and Koop examine the Scottish Premiership (soccer), and domestic violence in the Glasgow area from January 2003 until October 2011. Two long-term and fierce rivals, Celtic and Rangers, are based in Glasgow. Together, they are referred to as the “Old Firm.” 

• Old Firm matches (that do not have extremely “unexpected” outcomes as the rivals are always competitive with each other) are associated with increased domestic violence (by some 36%); other Scottish Premiership matches, not so. (Another event that brings a significant increase in domestic violence is the Christmas/New Year’s holiday.) 

• Unexpected outcomes only are correlated with increased domestic violence for a restricted set of matches that are very important in terms of final league standings. That is, football-related loss aversion is not generally a big deal for Glaswegian domestic violence.