Salas-Morellón, Palacios-Huerta, and Call (2021), “Dynamic Inconsistency in Great Apes"

Laura Salas-Morellón, Ignacio Palacios-Huerta, and Josep Call, “Dynamic Inconsistency in Great Apes,” July 2021. 

• People often display impatience when they are making decisions about rewards either right now or (larger rewards) with a slight delay. 

• The impatience is reduced if both the options are delayed, say, by an additional month; hence, there is a possibility for dynamic inconsistency, where people opt to be patient for choices concerning the distant future, but when those same choices become closer to the present, the less patient, immediate gratification choice becomes more attractive. 

• Do bonobos, gorillas, and orangutans – who share some 99% of their DNA with humans – display similar choice patterns? If they do, that suggests that human preferences are not due to human cultural factors, but are rather baked into us by our genetic make-up. 

• The "N" is quite small: 6 orangutans, 5 bonobos, and 4 gorillas. One of the gorillas was left out of the full experiment due to not meeting the pre-test criteria. 

• In the experiments, apes are offered the choice between an immediate reward (fruit) and a three-times-larger reward that is delayed by three minutes. 

• The same choices are again offered to apes, but this time, the “fast” reward arrives after three minutes, and the delayed reward arrives in nine minutes. 

• The apes prefer more to less, if the time delay is the same. 

• The apes prefer sooner to later, if the reward is the same. 

• The apes show more patience for the larger reward when both the options are delayed; that is, like humans, they seem to be subject to dynamic inconsistency in their intertemporal choices. 

• As the small sample-size suggests, the statistical significance of the results is quite limited.

Goldin and Reck (2018) on Normative Ambiguity

Jacob Goldin and Daniel Reck, “Rationalizations and Mistakes: Optimal Policy with Normative Ambiguity.” American Economic Association Papers and Proceedings 108: 98–102, 2018. 

• Choices often look like they involve frictions, such as a psychic cost associated with considering more options. 

• But though choices look “as if” they are affected by such costs, are the costs themselves “real,” or, to use the authors’ term, “normative”? 

• If the costs are normative, then (all else equal) you want to avoid them, such costs detract from welfare. But if the costs are not normative (that is, if they are “behavioral” in the authors’ terminology) then it would promote welfare to ignore those costs, to willingly incur them by, say, considering more options or requiring active choices – as the costs are not real, no one will end up bearing those costs. 

• Initial health care choices have a tendency to become defaults, and hence have some (undeserved?) staying power. 

• But perhaps it is optimal to stick with even clearly dominated health care plans, because the costs of switching or of just to paying attention to more options are normative and significant. 

• That is, do we really want to encourage people to switch health care plans to ones that are better suited to their health care needs and preferences, given the potential for normative switching costs? 

• Costs of trying to qualify for the Earned Income Tax Credit (EITC): the need to file taxes; record-keeping; mental exertion and attention; increased risk of being audited. 

• Note that most of the costs of establishing EITC eligibility take place in the present, with the benefits delayed. Present biased people will find this temporal distribution of costs and benefits to be unattractive. Should we encourage EITC take-up among present-biased people? 

• Other “mistakes” (or behavioral features) that dissuade applying for the EITC could be procrastination or inattention. 

• Moving to a new residence is costly both financially and otherwise, and again, the costs often are immediate whereas the benefits are delayed. Do people move enough, or do the “not real” but behavioral costs discourage beneficial relocations? Public programs that promote moving will be less valuable to the extent that these costs are normative.

Lowenstein (2019) Responds to Duckworth, Milkman, and Laibson (2019)

George Loewenstein, “Self-Control and Its Discontents: A Commentary on Duckworth, Milkman, and Laibson.” Psychological Science in the Public Interest 19(3): 95-100, 2019.

• Much to admire in Duckworth, Milkman, and Laibson (2019), especially the categorization of strategies to bolster self-control into situational v. cognitive and self-deployed v. other-deployed.

• Two (sort of) implicit assumptions seem to hover around the analysis, however, and I [Loewenstein] want to challenge those assumptions (assumptions which the authors themselves do not accept).

• One assumption that readers might come away with is that worsening problems such as lack of savings or obesity are brought about by self-control shortcomings, and that the strategies presented in Duckworth, Milkman, and Laibson (2019) are appropriate means to solve those problems. But inadequate self-control is not the source of (relatively recent) problems like rises in obesity and declines in savings. Rather, these problems have other, large causes, and thus, other solutions.

• A second assumption that readers might adopt is that self-control is about trying to get people to take a longer-term perspective. But many people suffer from being excessively future-minded (they are "hyperopic") -- these people need enhanced self-control to limit their future focus, to increase their current indulgence.

• The US has only become an outlier among nations with respect to undersaving and obesity in the past 40 years or so -- these problems do not reflect a new wave of a lack of self-control that swept across the land. What has changed is, for instance, a growth in income inequality and in the availability of snack foods and credit cards.

• Self-control is not about the present versus the future; it is about affect (System 1) versus more considered thinking (System 2) – this is why some people indulge insufficiently (“tightwaddism” and workaholism). (Look at the substantial investments people make in education -- do these evince present bias?) Mental accounting (like establishing an entertainment account) can help with future bias, too!

• Behavioral economics research might have a puritanical (or "Calvinist") bias.

Fennell (2019), "Personalizing Precommitment"

Lee Anne Fennell, “Personalizing Precommitment.” University of Chicago Law Review 86(2): 433-458, March 2019.

• Achieving long-term goals such as losing weight or writing a book requires the cooperation of many temporal selves of the same individual -- and perhaps the indulgences of some Mr. Hydes will undermine Dr. Jekyll's best-laid schemes. Precommitment can help, and the law might have a role to play in making such precommitments more available.

• Fennell invokes the "scale mismatch" terminology of Drazen Prelec; scale mismatch is when the goal (such as losing weight) is achieved in aggregate terms but the steps (literally?) to achieve the goal are lots of small individual decisions.

• Rigid rules – exercise one hour every day – might work in overcoming these temporal internalities, but such rules might be excessive or so demanding that they are abandoned.

• Perhaps people can fashion their own, less rigid but more sustainable rules? Good choices of “partitions” and “menus” can aid the process. For instance, appropriate serving sizes and types of serving utensils and single-serve packaging: all of these nudges can contribute to achieving a weight-loss goal.

• Segmentation eases metering and monitoring. How much cake did I eat? It might be easier to know the answer when the cake is consumed in segmented units -- I had three cupcakes -- than when I just keep picking at some unsegmented blob o' cake.

• Writing a book might be made manageable by segmenting the task into chapters and sections. But…while smaller chunks are easier to complete, given scale mismatch, they also look less meaningful in terms of progress, and more capable of postponement.

• Instead of segmenting work time, what about segmenting time not spent working – like limiting breaks to ten minutes?

• Monetary issues often can be addressed with precommitments and partitions. Purchasing a home can be a sort of forced saving – but this commitment device can be undone by easily acquired home equity loans. Can programs be provided that allow people to opt into a "no home equity loans" condition? 

• People might try to earmark money for savings by having special accounts or even physical envelopes -- though the commitment can be undone if an emergency arises. In general, setting high savings targets with sub-partitions (so that prematurely opening one savings envelope does not mean that all the others are opened, too) looks like a pretty good strategy. Even precommitting some money to indulgences can aid the larger goal of saving money. Should bank savings accounts come with earmarked sub-accounts that are made salient in web-based representations, say?

• Online menus could be personalized, by removing some excessively tempting items at the consumer’s request. 

• Rigid rules such as “no dessert” prune the menu to two choices: comply or don’t comply: “the reason that they can be so effective – the extreme chunkiness of the choices they present – is also the reason why they often fail” 

• Rules change the effective payoffs: the good choice becomes more automatic, and the wrong choice bears a higher price. 

• Lapses can induce further failures. Ex ante, it often is best to believe that behavior is bundled, that a lapse today will mean a rapid downward spiral. (Fennell calls such notions "behavioral firewalls"; in this case, good behavior today prevents future bad behavior.) Ex post (after a lapse), however, it is best to believe that the lapse was anomalous, that it doesn’t fore-ordain future behavior. Now the firewall changes: future behavior must be sealed off from the lapse.

• As with money set aside for financial indulgences, limited, planned exceptions can be helpful – but perhaps not implementable, perhaps zero tolerance, rigid rules are needed. 

• Receiving an income tax refund can be a form of forced savings or a welcome source of wam – but private firms can offer products that undo the commitment element of tax refunds. The IRS, incidentally, provides a split-refund facility, to allow the funneling of part of a refund into savings.

Monterosso and Ainslie (2007) on Recovery from Addiction

John Monterosso and George Ainslie, “The Behavioral Economics of Will in Recovery from Addiction.” Drug and Alcohol Dependence 90(Supplement 1): S100-S111, September 2007.

• Addicts have severe self-control issues with respect to the object of their ardor.

• The goal of this article is to suggest that behavioral economics ideas are fruitful not only in thinking about the process of building an addiction, but also in understanding recoveries from addiction.

• Dynamic inconsistency seems to be tied up in addiction: addicts often express (quite credibly) desires to quit or cut down, but do not follow through on those desires.

• But dynamic inconsistency might also suggest pathways out of addiction – and many treatment programs look to develop these pathways, which involve internal, not external, commitment devices (“private side-betting”).

• Drug use would not be a problem if the pain arose immediately, and the gratification arrived after a delay.

• “Hyperbolic discounting implies that the increase in valuation that occurs when moving a fixed unit of time closer to an expected outcome is proportionately greater the closer one is to that outcome. Think of the experience of waiting for an additional day for an important event that is a year off, versus for one that is imminent [p. 3].”

• Hyperbolic discounting sets one up for dynamic inconsistency of the immediate gratification variety; further, addicts tend to display higher discount rates than non-addicted people (though causality might go both ways). How is it that people with this sort of discounting ever recover, and become dynamically consistent with respect to their intentions to indulge in drugs, say?

• A hyperbolic discounter has a multitude of different (time-based) “interests” – it is Jekyll and Hyde and the rest of the London population, too.

• How does one “interest” protect itself against foreseeable future “interests”? One approach is to make the tempting act unavailable, or raise its cost – perhaps by announcing to your social circle that you are on a diet, for instance, or are having a Dryuary. Or maybe you can deflect your attention (subconsciously) from activities that lead to your problem activity, or develop a repugnance towards them.

• These approaches are not really about willpower; rather, they signal a sophisticated understanding of your own future lack of willpower. And yet many treatment programs harp on building willpower.

• Another method to bolster willpower is a form of mental accounting: you bundle current choices with a string of future choices. In this way, a choice to drink today isn’t just about drinking or not drinking today: a choice to drink means that you will make a similar choice in future days – and that prospect might be sufficiently harrowing to keep you from drinking today.

• Experiments show that humans and non-human animals do choose less impulsively when they know that the current choice will bind similar choices down the road.

• What if you knew that having a drink today would have no effect on your future behavior, that you were pre-determined to drink every future day? What if you were told that you were pre-determined to never drink again, whether or not you drink today? It looks like current abstention is bolstered by the notion that it can influence future choices! But people do abstain, so they must see a link between today’s choice and future choices.

• Bundling can arise when someone sees that “I’ll smoke today and quit tomorrow” will also apply tomorrow, ad infinitum. Then, the actual choices today are “I’ll smoke today and forever” or “I’ll stop today and not relapse.” The personal “rule” becomes “never smoke.”

• The situation is like an intrapersonal repeated prisoners’ dilemma: the only reason you choose to “cooperate” today is if you can thereby make it more likely that your future selves also will choose to cooperate.

• But recall: in iterated prisoners’ dilemmas, it is hard to restore cooperation after a single defection. Likewise, a single lapse from abstinence by a recovering addict can lead to a binge. This sort of behavior looks like it is better described by the “bundling” model or willpower, not a story of binding commitments.

• Why would an addict fall off the wagon?: “[T]o the extent that her abstinence is based on a bundling effect, the primary danger comes from factors that reduce her differential expectation of future abstinence as a function of current abstinence [p. 9].”

• This reduction of perceived danger can derive from overconfidence, underconfidence, or rationalization.

• Twelve-step programs emphasize that willpower is unreliable, yet their adherents seem to do better (than those in other treatment forms) in overcoming cravings.

• Twelve-step treatments seem to respond to the threats created by overconfidence, underconfidence, and rationalization. How? (1) powerlessness and its related credos; (2) the focus on abstinence and the permanence of addiction; and (3) the adoption of doable goals, such as “one day at a time,” while tracking the abstinence streak.

• “When a person structures her choices with personal rules she can be expected to express different preferences than she would if she were making a choice just on the basis of its own merits, and these preferences are apt to differ as well among categories of reward, according to their temporal distribution, emotional relevance, dangerousness, impulse control history, and doubtless many other factors [p. 12].” 

• There is a possibility for a deleterious positive feedback loop, where proximity to the temptation good (or a cue) increases the probability of consumption which increases appetite which leads to increased probability of consumption…

Downs and Loewenstein (2011) on Obesity

Julie S. Downs and George Loewenstein, “Behavioral Economics and Obesity.” In The Oxford Handbook of the Social Science of Obesity, John Cawley, editor, 2011.

• The rise in obesity is hard to explain via rational choice: think of the huge expenditures on failed diets and exercise programs, for instance. “Informational” interventions, such as better calorie information, might be fairly limited in terms of combatting obesity, then. 

• One cannot take a zero tolerance approach towards food; also, people have a habit of understating their consumption, or simply forgetting about snacks. 

• It doesn’t seem as if an increase in discount rates spurred the obesity rise, because discount rates have not risen, even though obesity is concentrated among those with higher discount rates. And present bias seems more applicable to food than it does to other types of decisions. 

• The future health costs of a bad diet are intangible, and for a single meal, negligible. Any one dietary indiscretion is (metaphorically) peanuts, but routinely neglecting these indiscretions – the “peanuts effect” – can lead to obesity and serious harm. 

• Field studies don’t show much improvement in calorie reduction from posting calorie counts. A decrease in consumption in one meal can be offset by later meals. 

• The rise in obesity tracks the rise in restaurant serving sizes fairly closely.

Professor Thaler’s American Economic Association Presidential Address

Richard H. Thaler, “Behavioral Economics: Past, Present, and Future.” American Economic Review 106(7): 1577–1600, 2016 (working paper pdf available here).

• Economics provides an approach to optimal decision making -- and that is well and good. But we should not let that model distract us from how people actually make decisions.

• When people make decisions, they make them as fallible Humans, not as textbook Econs. They remain fallible Humans irrespective of how often we are told that: (1) their decisions will look "as if" they are Econs; (2) their departures from the full Econ will be unsystematic; (3) when the stakes are high they will convert into Econs; (4) with time they will learn to be Econ; and, (5) the special magic of market settings will see to it that only Econs survive.

• Does the market "get prices right"? Consider the closed-end mutual fund with ticket symbol CUBA. Typically, CUBA is priced at about a 10-to-15 percent discount relative to its underlying assets. But after December 18, 2014, CUBA started to trade at a 70% premium over the value of its underlying securities, and premium pricing continued for about a year.

• Why? On December 18, 2014, President Obama announced that the US would normalize diplomatic relations with Cuba. The CUBA mutual fund has nothing to do with the country of Cuba.

• When Humans make decisions under uncertainty, the sort of preferences they display are not those of expected utility theory. Rather, many decisions seem to involve "prospect theory"-style preferences: (1) utility is based on changes in wealth from some reference point; (2) people are loss averse; and (3) people do not weight potential outcomes according to the objective probabilities.

• For intertemporal preferences, people often display a present bias, a taste for instantaneous gratification, and in many ways, do not exhibit exponential discounting.

• As with preferences, people also do not seem to hold fully rational beliefs. In particular, people display excessive optimism and excessive confidence in their beliefs.

• Actual choices are influenced by "supposedly irrelevant factors [p. 1595]," where the supposition of irrelevance is made within standard economic models. For instance, default settings tend to influence ultimate choices, even in high-stakes situations (such as retirement planning) where the defaults are less-than-optimal and easy to override.

• In the future, economic models will incorporate those behavioral features that best improve their predictive accuracy without imposing high costs in terms of complexity; "behavioral" will disappear as an adjective for a subset of economics, as all economics will be as behavioral as necessary.

Bhattacharya, Garber, and Goldhaber-Fiebert (2015) on Exercise Nudges

Jay Bhattacharya, Alan M. Garber, and Jeremy D. Goldhaber-Fiebert, “Nudges in Exercise Commitment Contracts: A Randomized Trial.” NBER Working Paper 21406, July 2015.

• The authors implement a natural field experiment: people who browse their way to stickK.com looking to sign a contract that requires them to exercise regularly are randomized into one of three conditions. 

• The three conditions differ based upon the default length of the exercise commitment contract; the default (which is easy to override) can be 8 weeks, 12 weeks, or 20 weeks. More than 8,000 people take part in the experiment (unbeknownst to them, it seems), though some of the analysis relates to approximately 3,000 subjects for whom a longer period of data is available. 

• A nudge towards longer contract durations succeeds; that is, a 20-week default setting leads to longer duration actual contracts than do the shorter default terms. More than one-in-five contractors choose to put up monetary stakes – they lose money if they fail to exercise to the terms of the contract – that average $23 per week. 

• Not only does the 20-week nudge result in longer duration contracts, it induces more weeks of exercise – though the average weeks of successful exercise are less than half of the specified durations. 

• About 6% of the sample enters into a second commitment contract after the expiration of their earlier contract. The data suggest that people would be much more likely to sign a second exercise commitment contract if they were placed into a long (more than 18 weeks) initial commitment contract, as if the longer duration helps cement an exercise habit. 

• Following the reporting of their empirical results, the authors develop a parallel theoretical model. The model offers a four-period version of a quasi-hyperbolic utility function; the four periods allow for a pre-contract period and, later, the option of signing a second contract. 

• The subjects are assumed to be present biased and sophisticated about their bias – after all, the subjects are interested in committing to exercise. Exercise in the model is a habit-forming good, but one involving current costs along with future benefits. Without commitment, present-biased people will choose to exercise too little, from the point of view of their own long-run (non-present-biased) preferences. 

• Small changes in the depreciation of exercise “capital” (which underpins the habit-forming nature of exercise) lead to large changes in optimal exercise choices. In contrast, even sizable changes in the degree of present bias have little impact on optimal exercise. 

• The authors offer a definition of a nudge that incorporates asymmetric or libertarian paternalism: a nudge in a given period t cannot decrease the person’s period t utility by very much. (But a nudge surely will decrease that utility, that is, it cannot make the period t person better off.) And though nudges must be small in this sense, they nevertheless can have a large effect on exercise choices, in particular, by helping to promote an exercise habit. A large nudge, however, can lead to so much present exercise that in future periods, exercise is eliminated, as the subject finds it optimal to rest on his or her exercise laurels. 

• Are sophisticated but present-biased people better off with a nudge? By definition, here, the person in the nudged period is not better off. Future selves can be helped or harmed, however – the overall welfare effects of nudges for a heterogeneous population are ambiguous.

Shakespeare on Present Bias and Hyperbolic Discounting

What is love? 'tis not hereafter;

Present mirth hath present laughter;

What's to come is still unsure:

In delay there lies no plenty;

Then come kiss me, sweet and twenty,

Youth's a stuff will not endure.

(Twelfth Night, Act 2, Scene 3, Lines 748-753)

Beard and Leitzel (2016) on Compensated Live Kidney Donations

T. Randolph Beard and Jim Leitzel, “Compensated Live Kidney Donations,” 2016; a slightly earlier version, June 17, 2015, is available at http://ssrn.com/abstract=2619934. This paper builds upon Beard and Leitzel (2014).

• To what extent are problems associated with compensation for kidney donations actually problems that already exist in the current system and/or are problems stemming not from the transplant system directly but rather from the organ shortage? The argument presented here is that most problems associated with the provision of donor compensation are either problems in the uncompensated system, too (and tolerably well-addressed), or, are problems of shortage, not of compensation.

• Uncompensated organ donation decisions -- which are not exactly of the everyday variety with meaningful feedback to build upon -- might not be made in a particularly rational fashion. 

• Standard “behavioral” influences, such as risk misperceptions, loss aversion, endowment effects, and present bias, seem to push people in the direction of not being a live organ donor. 

• Safeguards (including the provision of Independent Donor Advocates) are built into the donation system to counter misinformed, rash, or imprudent (psychologically, medically, or otherwise) donations, as well as coerced donations. 

• The introduction of compensation does little in terms of introducing new problems, though it might exacerbate present bias in decisions to donate, or intensify the potential for loss aversion along the "financial expectations" axis.

• One desirable system with compensation would look like the current system, though supplemented with back-loaded compensation, both in-kind and monetary. 

• What are the likely effects of ending the kidney shortage, beyond the lives saved? Nine effects are identified: (1) a diagnosis of End-Stage Renal Disease becomes less devastating; (2) the reluctance to add patients to the transplant list dissipates; (3) the “who gets to live” question loses much of its salience; (4) patient incentives to seek out the black market evaporate; (5) the expansion of acceptability criteria for a kidney ends or is reversed; (6) one risk of donating a kidney declines, in that a donor is assured of being able to acquire one later him or herself; (7) the need for ESRD patients to plead their case for an organ is obviated; (8) family relationships become less strained by an ESRD diagnosis; (9) the incentives to take preventative measures to stave off kidney failure decline.

• So, eight of the dimensions affected by an end to the kidney shortage would alter for the better if the shortage were eliminated -- and the undesirable impact along the ninth dimension simply reflects the fact that an improvement in the treatment of a medical condition implies that the threat represented by the condition diminishes. 

Sadoff, Samek, and Sprenger (2015) on Food-Related Time Inconsistency

Sally Sadoff, Anya Samek, and Charles Sprenger, “Dynamic Inconsistency in Food Choice: Experimental Evidence from a Food Desert.” January, 2015 [pdf].

• The authors present the results of a natural field experiment: the subjects did not know at the time that they were participating in an experiment. 

• The subjects receive $10 in a special budget each week for two weeks; they can buy ten units of food each week, as each unit costs $1. There are 20 different food items available, half of which are healthy, and half of which are unhealthy. The selected food items are delivered to the subjects’ homes. 

• At the onset, before selection or delivery, the more than 200 subjects rate how much they like the 20 food items. Then they choose their items for the first week’s delivery. 

• At the time of delivery of the ten selected items, the subjects are given a surprise presentation of four additional goods, which can be exchanged on a one-for-one basis with any of the delivered items; so, participants have an opportunity to partly change their minds. The four additional items are foods they rated highly, two healthy, two unhealthy, and include at least one item of each type that was not in the pre-arranged bundle. 

• The idea is that any exchanges made at the time of delivery are evidence of time inconsistency; the researchers focus on exchanges that alter the healthy-unhealthy mix: 21% (46 of 218) of the subjects show such an inconsistency, and 44 of those 46 move to a less healthy mix. 

• In the second week, one day before delivery, subjects are asked if they would again like the extra four items brought for a potential exchange (with their new, pre-arranged bundle). One-third of the subjects say “no thanks,” that is, they choose to commit to not being offered a future opportunity to exchange. 

• People who are dynamically consistent in week 1 are more likely (than are the dynamically inconsistent) to say "no thanks" to the offer to have the extra items available. That is, those subjects who successfully fight temptation in week 1 are those who make most intensive use of the commitment device that eliminates temptation. Further, those who prefer not to have the option to change tend to choose relatively healthy bundles in the first instance. 

• The theoretical underpinning of Sadoff et al. (2015) derives from articles by Gul and Pesendorfer, and by Fudenberg and Levine. In these models, the mere existence of a tempting good, even if it is not chosen, in a sense alters a consumer’s reference point in such a way that the value of consuming other goods is somewhat compromised by the tempting option. People in this situation, and who understand it, will want to restrict their options, even though they are eliminating options that they know they will not choose in any event. 

• In the O’Donoghue and Rabin (2003) approach (as described here), alternatively, it is only sophisticated, present-biased consumers who know that they would succumb to temptation who find it worthwhile to restrict their future options. 

• The analysis suggests that encouraging people to make their food choices well in advance of consumption might help spur the consumption of relatively healthy foods. (Note that the grocery deliveries in the experiment generally are not consumed right away, either, and hence the additional items might not be all that tempting. Gains to precommitment might be even larger in the face of more intense temptation.) 

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.

Quasi-Hyperbolic Discounting and Dynamic Inconsistency

OK, this one is not an outline. Rather, it is a simple three-period example that is meant to give some flavor for quasi-hyperbolic discounting and dynamic inconsistency, in comparison with exponential discounting and dynamic consistency.

Consider a three-period horizon (though the ideas apply to any longer timeframe): the current period (period 0), period 1, and period 2. How do you decide, among all available three-period consumption bundles, which one to choose? Presumably you have some utility function, U(x0, x1, x2), which represents your preferences over the three-period consumption streams, which for our purposes will be treated as dollar amounts.

Exponential discounting: If you are a standard, exponential discounter, your utility over consumption bundles can be written as U(x0, x1, x2) = u(xo) + δu(x1) + δ²u(x2), where your per-period discount rate, δ, typically would be some number less than one. Let’s say it is .9, so that utility from consumption to be received next period is worth, right now, only .9 of what it would be worth if received immediately: U(x0, x1, x2) = u(xo) + .9u(x1) + .81u(x2).

Quasi-hyperbolic discounting: To get to quasi-hyperbolic discounting, start with our exponential discounter, with U(x0, x1, x2) = u(xo) + δu(x1) + δ²u(x2). A quasi-hyperbolic person has an additional present bias, such that every delayed utility counts even less from the point of view of today: U(x0, x1, x2) = u(xo) + βδu(x1) + βδ²u(x2). If β=1, then we are back at exponential discounting, but for β<1,we have both time discounting and a present bias. Let β=.5, say, and stick with δ=.9: U(x0, x1, x2) = u(xo) + .5(.9)u(x1) + (.5)(.9)²u(x2) = u(xo) + .45u(x1) + .405u(x2). Again, what is added by quasi-hyperbolic discounting is the notion that the current period is in a different league from all the rest, or maybe that all the rest are in a different league from the current period: they are additionally discounted thanks to the present bias. 

Dynamic Inconsistency: A quasi-hyperbolic consumer is at risk of making plans for current and future consumption – plans that are optimal when they are made, at the present moment – that he or she will not follow as time passes. This future unwillingness to abide by optimal plans (in a world where no new information or options become available as time goes on) would never occur with an exponential discounter. 

Consider an example. Let u(x)=x; assume there is no standard discounting (δ=1), and consider two consumption bundles. Bundle A involves (x0, x1, x2) equal to (10, 10, 10), whereas bundle B involves (10, 14, 4). These consumption bundles have identical consumption in the initial period, which is an important element of the argument that follows, though not necessary for the larger point (beyond this example) about time inconsistency. 

For an exponential discounter (β=1), at time 0, U(A) = U(10, 10, 10) = u(xo) + δu(x1) + δ²u(x2) = 10 + 10 + 10 = 30 utils, whereas U(B) = U(10, 14, 4) = 10+14+4 = 28 utils, and A is preferred. Now imagine that one period has passed, and our consumer already has consumed her x=10 (which she would get with either A or B). The remainder of bundle A is now (with the new “current” period) (x0, x1) = (10, 10), and the remainder of bundle B is (x0, x1) = (14, 4). U(10, 10) = 20, and U(14, 4)= 18, and bundle A still remains preferred, as it should, one might think, since it was preferred before and the original initial period, now gone by, involved the same consumption with A or B. 

Continue to assume that there is no standard discounting (δ=1), but allow for the existence of present bias: β=.5. For our quasi-hyperbolic discounter, at time 0, U(A) = U(10, 10, 10) = u(xo) + βδu(x1) + βδ²u(x2) = 10 + .5(10) + .5(10) = 20 utils, whereas U(B) = U(10, 14, 4) = 10+7+2 = 19 utils, and A is preferred. 

Now again imagine that one period has passed, and our consumer already has consumed her x=10 (which she would get with either A or B). The remainder of bundle A is now (with the new “current” period) (x0, x1) = (10, 10), and the remainder of bundle B is (x0, x1) = (14, 4). U(10, 10) = 10 + .5(10) = 15, and U(14, 4) = 14 + .5(4) = 16, and now bundle B is preferred! Are you appropriately amazed? [One could imagine this another way, where our consumer is told she will get 10 this period, and has to decide whether she wants 10 and 10 in the subsequent two periods, or 14 and 4. She replies, 10 and 10. But one period later, when asked if she will stick with her original plan, she says no, she wants 14 and 4. This is an example of dynamic inconsistency, and it would not occur with an exponential discounter.]

Duflo, Kremer, and Robinson, “Nudging Farmers to Use Fertilizer…” (2014)

Esther Duflo, Michael Kremer, and Jonathan Robinson, “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.” American Economic Review 101: 2350-2390, October 2011.

• The (limited) use of fertilizer seems to hold very high returns – both social returns and private returns. Why do so many farmers not apply fertilizer, when it would seem to be in their private interest to fertilize? Behavioral biases, perhaps – and in particular, procrastination. 

• Some farmers are only partially sophisticated, overestimating the probability that they will be patient in the future. Calibrations suggest nearly 50% fit this category. These farmers might choose to postpone fertilizer purchase, fully expecting to buy it later, and then fail to follow through on their plan. 

• Offering small, time-limited fertilizer discounts just after harvest (when farmers have cash) can significantly increase purchase by such partially sophisticated farmers. 

• The use of a second dose of fertilizer has negative social returns, but farmers might administer a second dose if the price is highly subsidized. Hence a small, time-limited discount might be a better policy than large subsidies, even if the large subsidies spur fertilizer use, too. 

• Small, time-limited discounts have other advantages. First, they are not that demanding upon the public purse; second, if fertilizer isn’t really such a good idea, if it has negative returns, farmers probably won’t administer it (which is the socially efficient behavior under the negative-returns circumstances). The small subsidy limits the possibility that socially-excessive amounts of fertilizer will be applied.

Cooper and Kovacic (2012) on Regulators

James C. Cooper and William E. Kovacic, “Behavioral Economics: Implications for Regulatory Behavior.” Journal of Regulatory Economics 41: 41-58, 2012.

• The principal is the legislative or executive overseer, whose preferences are assumed to be short-sighted. The agent is the regulator, who thinks she knows the (socially) optimal policy – but she might be biased -- and pays a price when the policy choice varies from what she views as best. The regulator also possesses career concerns that favor obeying the legislator. 

• If the regulator puts no weight on pleasing her boss, or if the overseer is unable to punish a wayward agent, the regulator will choose what she thinks is the first-best policy. 

• Behavioral biases (like availability, optimism, hindsight) make the regulator more like the short-term politician. The call to “do something” might push the confirmation bias in the direction of the principal’s preferences, too. The status quo bias and the confirmation bias have ambiguous implications for the regulator’s policy choices. 

• Regulators only hear about some issues when intervention is requested by a constituent – creating an anchoring effect. Publicly announced positions also generate an anchor. 

• Regulators do not operate in a competitive market environment, and their sources of feedback are not as strong or timely as firms often receive – so biases can persist. Poor regulators generally do not exit the profession. Indeed, the feedback received from legislators is likely to result in regulators who are too short-term oriented, or whose biases make them behave as if they were. 

• Internal and external adversarial proceedings might aid regulatory choices. The regulators can set up an A-Team and a B-Team and let them present their cases. (The FTC has economists work up a case independently of lawyers.) More ex post evaluations, focused on outcomes, not outputs, along with longer tenure for regulators, could help.

Burke, Luoto and Perez-Arce (2014) on Soft and Hard Commitments

Jeremy Burke, Jill E. Luoto and Francisco Perez-Arce, “Soft versus Hard Commitments: A Test on Savings Behaviors [pdf].” RAND Labor & Population WR-1055, July 2014.

• One approach to increase savings is to offer people “commitment accounts,” which make it hard to withdraw funds and which might even result in losses if the saver does not live up to her commitments. It is commonplace for most people to turn down the opportunity to enter into commitment savings accounts. 

• This paper looks at a softer approach, where people are given a convenient way to save money, and are encouraged to do so, but without any commitment. The idea is that more people will find such accounts attractive, perhaps raising total savings relative to both commitment accounts and the status quo. 

• An online experiment is conducted with US subjects who indicated that they wanted to save more. They know they will be given $50, $100, or $500 (usually $50!), which they can receive after a brief delay, or they can save some or all of the money over the subsequent six months. Before they know which amount they are given, they are asked to make decisions regarding saving the different amounts at an annualized interest rate of 30%. 

• The savings options are not the same for everyone, however. Rather, the subjects are randomly selected to either the control – a standard savings account with no withdrawal restrictions – or to a soft or a hard account. The hard account allows no withdrawals until the six months have passed; the soft account is like the control, except that subjects receive subtle, active suggestions to save. Irrespective of the account they are selected for, the vast majority of subjects save some of their experimental windfall. Nonetheless, take-up is highest for the soft account, and the amount initially saved also is highest for the soft account – including among the most impatient savers. 

• After six months, the soft account leads to higher savings than does the control account. Nonetheless, as money is withdrawn from the soft accounts over the six months, the hard account leads to even higher total savings at the end of six months.

Ashraf, Karlan, and Yin (2006), on Commitment Savings Accounts

Nava Ashraf, Dean Karlan, and Wesley Yin, “Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines.” Quarterly Journal of Economics 121(2): 635-672, 2006.

• The authors conduct a natural field experiment to see if people will open a savings account that has no advantages except for barriers to withdrawal. The offered SEED accounts (“Save, Earn, Enjoy Deposits”) prevent depositors from accessing funds unless a target deposit amount or date is met. Most of the participants who opened accounts chose the date-based method. 

• Individuals were randomly chosen to be offered a SEED account, and about 28% of those who received the offer accepted it. Others were offered nothing or were given encouragement to save more. All the people involved were bank clients who already had a regular savings account. 

• All participants were given a survey aimed at identifying customers who had time inconsistent preferences. The survey indicated that 27.5% of respondents were hyperbolic, while a surprising 19.8% were reverse hyperbolic, more patient today than for future choices. Hyperbolic women (but not men) are more likely to take up the SEED offer. 

• The Intent to Treat (ITT) effect reveals the impact of being offered (not necessarily accepting) the SEED account. The ITT effect involved a significant increase in savings. (The encouragement-to-save option did not increase savings.) The Treatment on the Treated effect reveals the increase in savings for those who opened a SEED account relative to controls who would have opened one if offered; here, it is about four times higher than the ITT effect.

• Is it ethical to offer relatively poor people a type of savings account whereby it is more than conceivable that they will never be able to recover their funds because they did not reach their savings goal? After one year, only 6 of the 62 participants who opened an amount-based account achieved their goal and hence could access their funds (page 657).

Kaur, Kremer, and Mullainathan (2010) on Self-Control at Work

Supreet Kaur, Michael Kremer, and Sendhil Mullainathan, “Self-Control and the Development of Work Arrangements.” American Economic Review 100: 624-628, May 2010.

• The starting point is the notion that self-control shortcomings make it likely that workers will not work as hard as THEY would like – and workplace organization can counteract these self-control problems. 

• Once again we are faced with the welfare question of whose side we are on, the patient long-run worker or the present-biased worker who makes all the current decisions. 

• Work often involves a long lag between effort and reward; regular pay can reduce that lag for a worker. 

• Having the work pace set by some outside force (the assembly line) is a type of commitment device.

• The production setting can involve cues such as uniforms that might promote work effort. 

• Co-workers will be the source of peer effects, which can operate through various channels, including emulation and monitoring; the peer effects might or might not contribute to production efficiency. 

• The article describes an experiment with Indian piece-rate workers engaged in data entry. Instead of the standard piece-rate, they could choose a target output, and be penalized (by losing half their wages) if they failed to reach it. About one-third of those offered these commitment contracts accepted them.

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.

O’Donoghue and Rabin (2003) on Paternalism and Sin Taxes

Ted O’Donoghue and Matthew Rabin, “Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes." American Economic Review 93(2): 186-191, May 2003.

• “Economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it [page 186].” 

• In the quasi-hyperbolic utility function, Beta < 1 implies a time-inconsistent preference for immediate gratification. In the welfare (efficiency) analysis, this preference for immediate gratification is treated as an error. That is, society sides with the long-run Dr. Jekyll, not the impatient short-run Mr. Hyde. 

• In the model, potato chips have present benefits but future costs. The quasi-hyperbolic decision maker, or at least the Mr. Hyde component of that decision maker, undervalues those future costs. 

• What is the most efficient way for the government to raise (a given amount of) revenue through taxes on the two goods, carrots and potato chips? If there were no present bias, both goods should be taxed equally. But if some consumers display present bias, efficiency suggests taxing the tempting good, potato chips, at significantly higher rates. 

• High taxes on potato chips do not harm fully “rational” consumers much, but help present-biased people significantly by internalizing the “internality.” 

• Offering commitment options to sophisticated present-biased people could help them, with little or no cost to those who are not biased. (A sophisticated present-biased person is someone who understands that she is present biased, and hence might be willing to pre-commit in such a way as to restrain her future choices.)

• More generally, policy might want to take into account the possibility of less-than-rational behavior. Some policies that might be valuable include mandatory cooling-off periods, required information disclosure, and careful selection of default options.