Judgments and Decisions
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.
• What would you rather have?
A. $100 today
B. $110 in a month
• What would you rather have?
A. $100 in 12 months
B. $110 in 13 months
Normative Theory of Discounting
• Money should be discounted at a
constant rate over time.
• This implies that preferences will be
consistent over time.
Now vs. Later
• What people want NOW often conflicts with
long-term goals
– Buy now vs. save for future
– chocolate cake now vs. weight loss and
longevity
– Party now vs good grades later
• The “Planner” inside us is concerned with
lifetime utility, whereas the “Doer” cares only
about immediate gratification.
Spending vs. Saving
• Economic 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 expectancy
The life cycle hypothesis:
An example
• Tom 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.
The Data
• Tom 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.)
Self-control
Animals 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.
Dynamic inconsistency
• Example --- 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).
Our preferences are not always
consistent. They can change in
heat of the moment
• Proclaiming love in a moment of lust
• Shopping on an empty stomach
• Expecting 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?
Hot-cold empathy gapsLoewenstein
• When 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
What does psychology tell us
about when attempts at selfcontrol are likely to fail?
• When goals are vague
• When we’re in a bad mood-sadness,
stress
• When we’re not monitoring our
behavior
– mindless eating in front of tv
– No budget
– Under the influence
Self-control as a limited
resource
-Baumeister
• Self-control works like a muscle
– It can only be taxed to a certain point
– It 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.
Chocolate and Radishes
• Lab room set-up with freshbaked chocolate chip cookies
and radishes
• Participants were instructed to
eat either radishes or chocolate
chip cookies
• Participants were then asked to
solve impossible puzzle
Puzzle Results
Condition
Time
Spent (min)
Attempts
Tried
Radish
8.35
19.40
Chocolate
18.90
34.29
No food
control
20.86
32.81
Choice depletes willpower
• Controlling 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.
Depletion can lead to
impulse buying
• Conflict between control and
indulgence
• Often cue-based—triggered by a
feature of the environment
• What can we do about this issue
and other issues of self control?
Pre-commitment devices
• Sometimes people pre-commit to
avoid temptation
– Placing alarm clock across the room
– Staying out of bars
– Christmas clubs
– Individual snack packs
– ATM limits
– www.Stickk.com
Pre-commitment in Action
Micro-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 group
Rationing vices
• People tend to be less price
sensitive for vices than for
virtues
• Example: They may buy one
pack of cigarettes when they
could easily afford a 10-pack
carton.
Other self-control tools
• Anticipatory
feelings (e.g.,
regret)
• Moral values/
Guilt, Shame
• Policy
Policy interventions
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.
Results: Percentage of Salary
Put into Savings
ALL
No
Advice
Took
Advice
Took
SMarT
Declined
Advice
315
29
79
162
45
Pre-advice
4.4%
6.6%
4.4%
3.5%
6.1%
1st Pay Raise
7.1%
6.5%
9.1%
6.5%
6.3%
2nd Pay Raise
8.6%
6.8%
8.9%
9.4%
6.2%
3rd Pay Raise
9.8%
6.6%
8.7%
11.6%
6.1%
4th Pay Raise
10.6%
6.2%
8.8%
13.6%
5.9%
N