Present-Biased Preferences (continued)

Transcription

1 Present-Biased Preferences (continued) April 28, 2009

2 Present-Biased Preferences: Evidence Eliciting time-preference experimentally: Choose $15 today or $X one month from today u(15) = δ m u(x ), where delta m is the monthly discount factor Thaler (1981) estimates discount rate of 345% over one-month horizon 120% over one-year horizon 19% over ten-year horizon

3 Present-Biased Preferences: Evidence FLO (2002) summarizes the estimates from the literature 362 Journal of Economic Literature, Vol. XL (June 2002) imputed discount factor time horizon (years) Figure 1a. Discount Factor as a Function of Time Horizon (all studies) imputed discount factor time horizon (years) Figure 1b. Discount Factor as a Function of Time Horizon (studies with avg. horizons > 1 year) although they did not interpret their results the same way. If Read is correct about subadditive discounting, its main implication for economic applications may be to provide an alternative psychological underpinning for using a hyperbolic discount 4.2 Other DU Anomalies The DU model not only dictates that the discount rate should be constant for all time periods; it also assumes that the discount rate should be the same for all types of goods and all categories of intertemporal decisions. There are sev- The discount factor gets closer to 1 the longer the horizon, up to a point.

4 Present-Biased Preferences: Evidence Preference-reversals: Preference between two delayed rewards can reverse in favor of the closer reward as the delay diminishes Example: $110 in 31 days $100 in 30 days but $110 tomorrow $100 today Observed both in humans and in pigeons

5 Field evidence: Shapiro (2005): caloric intake declines about 0.45 percent per day after the receipt of food stamps ( 13-14% per month) payday effect : spend a lot of paycheck as soon as you receive it; high degree of short-run impatience Conflict between short-term vs. long-term patience levels: Ulysses & the Sirens Massive amounts of credit card debt: $5000 per household in 1998, with 16% interest rate on average. Those without credit card access borrow at even higher rates However, households accumulate substantial wealth over lifetime in long-term savings, such as housing or 401k s. Financial advice: cut up your credit cars, freeze into block of ice Pattern: short-run discount factors are lower than long-run discount factors. Present-Biased Preferences: Evidence

6 Present-Biases Preferences Ulysses story, financial advice reflect not just short-term impatience,... but also the fact that we often disapprove of and take steps against our own impatient tendencies. From a long-term perspective, we want to be patient. Let s go back to our example illustrating differing levels of self-awareness Then we ll look at commitment and welfare.

7 Self-Awareness A person with time-inconsistent preferences may or may not be aware of her inconsistency Let ˆβ be the person s beliefs about the true value of β A person is sophisticated if ˆβ = β A person is naive if β < ˆβ 1

8 Self-Awareness: Example Four-day trekkie convention film festival Thursday (day 1): The Motion Picture (u = 3) Friday (day 2): The Wrath of Khan (u = 5) Saturday (day 2): The Search For Spock (u = 8) Sunday (day 4): The Voyage Home (u = 13) Pam and Paige must each miss one movie Cannot commit in advance, must make decision day-by-day

9 Self-Awareness: Example Last time we established: Both have β = 1 2, δ = 1 Paige is sophisticated: ˆβ = β = 1 2 Pam is naive: ˆβ = 1 > β Paige skips the second movie, knowing that if she doesn t, she ll miss the last/best movie. Pam always thinks she ll skip the next movie, but procrastinates and ends up missing the last one.

10 Self-awareness & Welfare General lesson: if future misbehavior raises the cost of current misbehavior, then sophistication helps in overcoming the taste for immediate gratification. However, if future misbehavior lowers the cost of current misbehavior, sophistication hurts in overcoming the taste for immediate gratification. Pam & Paige were an example of the former. Now: example of the latter.