NSF Award Abstract - #0078796

AWSFL008-DS3

Collaborative Research on Behavioral Models of Intertemporal Choice

Abstract

Although the rational-choice model has yielded an array of insights across a broad range of human activities, research from psychology suggests that it is inaccurate in some systematic and important ways. The investigators propose to continue their agenda of integrating psychologically more realistic assump-tions about human behavior into formal economic models of intertemporal choice. Most of the investigators' past and proposed future research revolves around a single well-established phenomenon: Whereas the standard economic model assumes that preferences are time-consistent, evi-dence suggests people have present-biased preferences, wherein a person's relative preference for well-being at an earlier date over a later date gets stronger as the earlier date gets closer. But more than merely examining the implications of present-biased preferences per se, the investigators are particularly inter-ested in the importance of whether a person is aware of future self-control problems. Their research fo-cuses on the differing implications of assuming a person is sophisticated - fully aware of future self-control problems - or naive - fully unaware of future self-control problems. The investigators have two continuing projects that they plan to complete during the grant period. The first examines the implications of present-biased preferences for the consumption of addictive products. People with self-control problems tend to over-consume addictive products, but this behavior is affected by sophisticated awareness of self-control problems. Because sophistication makes people pessimistic about their ability to resist future temptations, and hence feel they might as well get addicted now, so-phistication can exacerbate over-consumption. Even so, we show that in realistic cases this pessimism effect is likely to be overcome by an incentive effect, wherein sophistication makes the person realize that current restraint may promote future restraint. In current work, the investigators are attempting to gener-alize and extend this earlier analysis, to explore such issues as the effects of price for consumption. In a second continuing project, joint with George Loewenstein of Carnegie-Mellon University, the investiga-tors explore the implications of a second systematic error that people make in the realm of intertemporal choice: People tend to underappreciate the influence of factors that change their future preferences, and hence to project current preferences on their future selves. The investigators and their co-author develop a formal model of such projection bias, and apply this model to several illustrative economic applications. In continuing research, they plan to apply their model in more depth to such things as addiction and mis-predictions of diminishing marginal utility of consumption. The investigators also have several new projects that are in the very early stages. The investigators plan to carry out the preliminary phases of these projects during the grant period. One explores procrasti-nation of long-term projects. Whereas most work on procrastination assumes that a project requires a sin-gle period of effort, most real-world projects take some duration to complete. This distinction is crucial for people with present-biased preferences, because whether a person starts a project and whether she finishes it become two distinct questions. Self-control problems can lead people to start but never finish projects, and, when faced with multiple ongoing projects, to choose the wrong projects to work on. In a second project, the investigators plan to analyze present-biased preferences in a general framework that allows them to build upon some of the points made in existing research. There is a simple intuition for how the effects of sophistication depend on how indulgence at different moments affect long-run well-being. When indulging in one period makes indulging in the other period more harmful to one's future well-being, sophistication about future indulgence leads a person to perceive high costs of current indul-gence and hence to misbehave less now. When indulging in one period makes indulging in the other pe-riod less harmful to one's future well-being, sophistication exacerbates indulgence. Preliminary analysis identifies a stylized setting in which this effect dominates, and yields insight on why it does not dominate in general.