November 2 2011 Temporal Discounting and Self Control What would you rather have A 100 today B 150 a year from now Temporal discounting of future money implies that the utility of money decreases with time ID: 156423
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Slide1
Judgments and DecisionsNovember 2, 2011
Temporal
Discounting
and Self ControlSlide2
What would you rather have?A. $100 today B. $150 a year from nowTemporal discounting of future money implies that the utility of money decreases with time. Slide3
What would you rather have?A. $100 today B. $110 in a monthWhat would you rather have? A. $100 in 12 months
B. $110 in 13 monthsSlide4
Normative Theory of DiscountingMoney should be discounted at a constant rate over time. This implies that preferences will be consistent over time. Slide5Slide6
Now vs. LaterWhat people want NOW often conflicts with long-term goalsBuy now vs. save for futurechocolate cake now vs. weight loss and longevityParty now vs good grades later
The “Planner” inside us is concerned with lifetime utility, whereas the “Doer” cares only about immediate gratification.Slide7
Spending vs. SavingEconomic theories of saving assume optimization, or utility maximization over the life span.The life-cycle hypothesis says that saving at any stage of a person’s life-cycle can be predicted by finding the stream of consumption that is utility maximizing given that person’s current income and wealth, expectation of future income, and life expectancySlide8
The life cycle hypothesis: An exampleTom and Ray are identical twins in every respect except Tom, a basketball player, earned the vast majority of his money early in life, and Ray, a manager, earned the vast majority of his money late in life.Tom ought to save his early income to increase his retirement income.
Ray ought to borrow from his future income to increase his early lifestyle income.Slide9
The DataTom will not save enough for retirement, and Ray will not borrow to fund his young lifestyle.Consumption drops sharply after retirement. Most saving done by Americans occurs through forced programs (home equity, pension plans, etc.)Slide10
Self-controlAnimals and children (and some adults), when given a choice between a small immediate reward and a larger later reward tend to choose the smaller reward.Slide11
Dynamic inconsistencyExample --- A dieter’s choice at time t between eating cake or fresh fruit at time T depends on whether the choice was made at t < T or t = T.
The “discount rate” depends on the time lag between decision (at
t
) and
consumption (at
T
). Slide12Slide13
Our preferences are not always consistent. They can change in heat of the momentProclaiming love in a moment of lustShopping on an empty stomachExpecting to keep a zero balance on a credit card Road rage
Suicide
Can we predict how we’ll behave in the heat of the moment?Slide14
Hot-cold empathy gaps- LoewensteinWhen in a “cold” (unemotional) state, we tend to under-appreciate the effect of “hot” states on our behavior
These hot states include emotions (e.g., anger), drives (e.g., hunger), and other feelings (e.g., pain)
Hot states focus motivation
on goods that can mitigate the visceral factor Slide15
What does psychology tell us about when attempts at self-control are likely to fail?When goals are vagueWhen we’re in a bad mood-sadness, stressWhen we’re not monitoring our behaviormindless eating in front of tvNo budget
Under the influenceSlide16
Self-control as a limited resource -BaumeisterSelf-control works like a muscleIt can only be taxed to a certain pointIt can be strengthened with work/effort
Self control is weakened by prior act of volition
Prediction: after exerting self-control in situation A, it is more difficult to do so in situation B.Slide17
Chocolate and RadishesLab room set-up with fresh-baked chocolate chip cookies and radishesParticipants were instructed to eat either radishes or chocolate chip cookiesParticipants were then asked to solve impossible puzzleSlide18
Condition
Time
Spent (min)
Attempts Tried
Radish
8.35
19.40
Chocolate
18.90
34.29
No food control
20.86
32.81
Puzzle ResultsSlide19
Choice depletes willpowerControlling for time spent shopping and other demographic factors, shoppers who made a lot of choices that day spent less time on the math problems and got fewer correct.Slide20
Depletion can lead to impulse buyingConflict between control and indulgence Often cue-based—triggered by a feature of the environmentWhat can we do about this issue and other issues of self control? Slide21
Pre-commitment devicesSometimes people pre-commit to avoid temptationPlacing alarm clock across the roomStaying out of barsChristmas clubsIndividual snack packsATM limits
www.Stickk.comSlide22
Pre-commitment in ActionMicro-Savings in the Philippines Ashraf, Karlan, and Yin 2006
“Commitment savings accounts”
707 banks clients offered accounts; 202 signed up
Same interest rates, but imposed restricted access until an end date
12 months later, average savings was 81% higher compared to control groupSlide23
Rationing vices People tend to be less price sensitive for vices than for virtuesExample: They may buy one pack of cigarettes when they could easily afford a 10-pack carton. Slide24
Other self-control toolsAnticipatory feelings (e.g., regret)Moral values/ Guilt, ShamePolicySlide25
Policy interventionsSlide26
The Save More Tomorrow Plan (SMarT)People pre-commit to saving more in the future.Saving increases are synchronized with salary increases.
People remain in the plan unless they drop out.Slide27
Results: Percentage of Salary Put into Savings