Transcript Globalproduktplatform og Integrationsprojektets fase 2 og 3

Intertemporal Choice
Ec 101 Prof. Camerer
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Time preference:
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Preferences for earlier vs later rewards
Important choices involve time
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longer time horizon  more irreversibility
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careers, children, retirement
Likely to be difficult
the brain is not evolved for long-term reward
 self-control: addiction, obesity, procrastination
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Institutions may help or hurt
”No money down!” vs expert advice &
external self-control (Soc. Security)
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1 Some history of intertemporal choice
2 Anomalies from discounted utility theory (LFR
review)
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3 Projection bias
4 Life-cycle savings
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Field tests
Mental accounting puzzles
Calibration exercise (Angeletos et al)
Experimental data
5 Research frontiers:
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Practical lessons
Sophistication vs naivete
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1. Some history of intertemporal choice (see Loewenstein, ch 1 L-Elster
Choice Over Time)
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Adam Smith (1776)
 ”impartial spectator” (cingulate, PFC?)
John Rae (1834)
Eugen von Böhm-Bawerk (1889)
Irving Fisher (1930)
Paul Samuelson (1937)
Robert Strotz (1956)
Phelps and Pollak (1968)
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Β- δ used to explain discounting of self and children (“future
selves”)
David Laibson (1994,97) adapted PP 68
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E.g., Fisher
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Personal determinants of time preference
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Foresight
Risk of future
Self-control
Habit
Life-expectancy
Concern for lives of other persons
Fashion: “In whatever direction the leaders of fashion first
chance to move, the crowd will follow in mad pursuit…”
Was critical of econ-psych divide:
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The fact that there are two schools, the productivity school
and the psychological school, constantly crossing swords on
this subject is a scandal in economic science and a reflection
on the inadequate methods employed by these would-be
destroyers of each other
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Discounted Utility Model
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Discount factor compresses many Fisherian forces into one term
Now accepted as normative and descriptive
 ”It is completely arbitrary to assume that the individual
behaves so as to maximize an integral of the form evisaged in
[DU]. (Samuelson 1937)
Utility and consumption independence
Exponential  time consistency
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2. Anomalies from DU (LFR)
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Measured discount factors are not constant
1. Over time
2. Across type of intertemporal choices
Sign effect (gains vs. losses)
 Neural substitution of ”loss” and ”delay”?
Magnitude effect (small vs. large amounts)
Sequence effect (preference for upward-sloping profiles)
Speedup-delay asymmetry (temporal loss-aversion).
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Magnitude and hyperbolic
effects
• $15 now is same as ___ in a month. ___
in a year. ___ in 10 years.
– Thaler (1981) $20 in a month (demand 345%
interest), $50 in a year (120%), $100 in 10
years (19% interest)
– Show discount rates decrease over time…
• Students asked:
– $150 vs. $x in 1 month, 1 year, 10 years
– $5000 vs $x ….
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Results of class survey
90%
$160
80%
Discount Rate
70%
60%
50%
150
$197
40%
5000
$500
30%
20%
$6,000
$14,000
10%
$5,100
0%
0
20
40
60
80
100
120
140
Months
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Figure 1 (LFR): Increasing variation over
time as more studies are done
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Figure 2 (LFR): Increasing patience with longer
horizons
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Discounting is important in
other domains
• Education (Duckworth,
Seligman 05 Psych Sci):
Predicts 14-yr olds’
grades
• “Not the will to
win…the will to
practice”
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Role of attention & cognition: Exposure and
‘distractions’ very powerful (Walter Mischel et al)
• Delay-of-gratification in
children (ring bell when
they can’t wait any
longer for better snack)
• Fun thoughts, covering
snacks enhances
patience…except if they
are thinking about the
snacks! (see Fig 6.1)
• Thoughts about
“arousing” features
versus “cognitive reappraisal” creates
impatience
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Field test:
Front-loaded buyouts for soldiers
(Warner-Pleeter AER 01)
• After the Gulf War in the early 1990s the
military enticed soldiers into retirement
• Choose between a lump sum payment
(on the order of $20K) and an annuity
(worth around $40K in PV @ r=10%)
• Officers: 50% took lump sum
• Enlisted: 90% took lump sum
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Officers
enlisted
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• Can estimate discount rates from large
n=55,000 sample (enlisted results)
– Male +.01
– Black +.035
– College -.048
– Test scores: high (-.016), medium (-.01)
– Size of lump sum (-.059/$10k) (largest fx)
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Vietnam exp (w/ Tomomi Tanaka, Quang Nguyen)
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General model estimation
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Benhabib, Bisin, Schotter (04)
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Θ=1 exponential =x*exp(-rt)
Θ=2 hyperbolic =x/(1+rt)
Graph for Θ=1,2,5 (r=.13)
BBS est. Θ (2.62,4.14), r (6.37, 33.64)
Vietnam villages: Θ=5.19, r=13, α=.88
– ROSCA participants have higher α
(+.15), lower r (-.04)
0.9
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0.7
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0.5
5
0.4
1
2
0.3
0.2
0.1
0
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Can also add fixed cost (-b) and variable
cost (α multiplier)
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1
5
10
15
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25
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– Highly variable estimates
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Projection bias
(Loewenstein, Read, Rabin )
• Overestimate duration of statedependence
is estimated utility in s’ from state s
α=0 rational
• Examples:
– Shopping while hungry
– Childbirth: Lamaze versus epidural painkiller during
labor
– Cannibalism
– Interpersonal: Difficult to imagine what people will do in
different emotional states...(looting, lynchmobs,
corporate scandals, crimes of passion, heroic acts...)
– Wilson-Gilbert ”affective forecasting” mistakes (fail to
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appreciate ’emotional immune system’)
Empirics: Catalog sales for
winter clothes items
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Winter-item catalog sales (Conlin, O’Donoghue, Vogelsang AER in press)
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2.4 million observations 95-99. One 1 day to process, 3-7 days to ship
Theory predicts returns will depend + on temperature on return day R
- on temperature on order day O
intuition: lower temp(O)  ”surprised” at ”high” temp(R) and then return
temp(O)
temp (R)
Structural estimates of α from .01-.64
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4. Lifecycle savings
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”Golden eggs and hyperbolic discounting”
Hyperbolics are tempted
Illiquid assets provide commitment
Two-thirds of US wealth illiquid (real estate)
 Not counting human capital
Access to credit reduces commitment
 Explain decline in savings rate 1980s?
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Borrowing: Boom in bankruptcies
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Borrowing: Credit card facts
• Average debt
outstanding by
income quintile (IQ)
$3,000
$2,500
IQ 1
$2,000
IQ 2
$1,500
IQ 3
IQ 4
$1,000
IQ 5
$500
$0
1970
14.8%
• Rates (APR, red)
have
fallen as interest rates
fall (blue). Blue is
“spread”
14.4%
1977
14.5%
1983
14.6%
1989
14.4%
1992
1995
1998
2001
14.3% 14.3%
13.7%
12.8%
6.6%
6.4%
6.4%
5.3%
5.7%
6.0%
5.0%
4.6%
4.0%
'95
'96
'97
'98
'99
12.3%
'00
'01
'02
'03
4.3%
'04
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Mental accounting and MPC
(Thaler-Shefrin 1988)
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Angeletos et al calibration
Model features
 Quasi-hyperbolic sophisticated preferences
 uncertain future labor income
 liquidity constraint
 allow to borrow on credit cards - limit
 hyperbolic discounting – implications
 labor income autocorrelated – shocks
 hold liquid and illiquid assets
Calibration strategy:
Fix some parameters, simulate behavior, compare properties with data
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Figure 3: Shapes of discount functions
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Figure 4:
- from Angeletos et al
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Figure 5:
- from Angeletos et al
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Figure 6:
- from Angeletos et al
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Figure 7:
- from Angeletos et al
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Table 1:
- from Angeletos et al
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Table 2:
- from Angeletos et al
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Habit formation Spending
• “The hedonic treadmill”
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Habit formation Spending
• “The hedonic treadmill”
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Optimal saving and investing: Do
‘sufficiently rational agents optimize?’
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Economics Nobel laureates reflect
(from LA Times)
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Beverage delivery apparatus
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5. Research frontiers:
Sophistication vs naivete
• Are hyperbolics “sophisticated”? or “naïve”?
• Sophisticated hyperbolics will prefer pre-commitment
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IRS refunds
Deadlines (Blockbuster vs Netflix)
Ulysses and the sirens
“Arrest me” list on riverboat casinos
Wertenbroch:
• Smaller package sizes of “vices” than “virtues”
• Cigarettes by the pack, gym contracts (Malmendier-Della Vigna
AER 06, $19/visit vs $10 visit fee)
• Q: Will markets work? Or does government have special
legal power to enforce these contracts? (e.g. Army
AWOL)
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Sophisticates seek self-control (from
periodic food stamp checks,
Ohls 92; Shapiro, 03 JPubEc)
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Factoid…
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80% of respondents have negative discount
rates! voluntary “forced saving”
(Shapiro JPubEc 03; cf. Ashraf et al QJE in press)
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Frontiers: Practical value of behavioral econ:
Save More Tomorrow™ (Benartzi-Thaler JPE 04)
• Exploit power of inertia and desire to avoid a
nominal decrease in pay
• Commit 1/3 of future raise to 401(k)
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Swedish privatization c 2000:
(Cronqvist-Thaler AER 04)
• Driven by desire for investor autonomy
– 456 funds, could advertise & set fees
– Information (fees, performance, risk) in book
form
– Big ad campaign: Investors encouraged to
choose their own fund (57% of young did)
– What happened?
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Swedish privatization: (CronqvistThaler AER 04)
• Autonomous
investors
– “home biased”
– high fees
– Poor
performance
– 03: 92% of
young choose
default
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Neural evidence: (McClure et al Sci 04):
u(x0,x1,…)/ β = (1/β)u(x0) + [δu(x1) + δ2u(x2) +…]
Impulsive β ↓
long-term planning δ ↓
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Problem: Measured δ system is all stimulus activity…
use difficulty to separate δ (bottom left), δ more active in late
decisions with immediacy…but is it δ or complexity?
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Other aspects of time in econ
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Other models and phenomena
 Habit formation (common in macro)
 Visceral influence (emotion-cognition)
 Temptation preferences (Gul-Pesendorfer 01 Emetrica)
w{w,t}t iff U(S)=maxxS[u(x)+v(x)] –maxy  S v(y)
 Anxiety/savoring/memory as consumption (Caplin-Leahy; e.g. wedding
planning)
 Multiple selves/dual process models
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Types of anticipation preferences
• Reference-dependent preferences (K-Rabin 04)
– Belief about choice changes reference point
– Endowment effects/”auction fever”
– Explains experience effects (experienced traders expect to
lose objects, doesn’t enter endowment/ f1)
• Emotions and self-regulation
– E.g. depression. Focusses attention on bad outcomes,
causes further depression
• Intimidating decisions
– f1 may increase stress about future choices
– health care, marriage, job market, etc.
– Better to pretend future choice=status quo
• Q: When are these effects economically large?’
– Avoid the doctor late cancer diagnosis
– Supply side determination of endowment effects (marketing)
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Three interesting patterns
• Self-fulfilling beliefs
– u2(δz,z)>u2(δz,z’) u2(δz’,z’)> u2(δz’,z)
– prefer z if you expect(ed) z, z’ if you expect(ed) z’
– Cognitive dissonance, encoding bias
• “If I could change the way/I live my life today/I wouldn’t change/a single
thing”– Lisa Stansfield
• Undermines learning from mistakes
• Time inconsistency
– Self 2 prefers z’ given beliefs u2(f1,z’)>u2(f1,z)
– but self 1 preferred to believe and pick z
u1(x,δz,z)>u1(x,δz’,z’)
– Problem: Beliefs occur after self 1 picks
• Informational preferences
– Resolution-loving: Likes to know actual period 2 choice ahead of time
– Information-neutral: Doesn’t care about knowing choice ahead of time
(“go with the flow”)
– Information-loving: Prefers more information to less (convex utility in f1)
– Disappointment-averse (prefers correct to incorrect guesses):
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• u1(x,δz,z)+u1(x,δz’,z’)> u1(x,δz’,z)+u1(x,δ
Surprising fact: If none of above hold, then personal equilibrium iff u* max’s
E(u1(z1,z2) I.e. only way beliefs can matter is through these
three
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Koszegi, “Utility from anticipation and
personal equilibrium”
• Framework: Two selves, 1 and 2
– Choices z1,z2 , belief about z2 is f1
– u1(z1,f1,z2)
– anticipation function Φ(z1,d2)=f1 (d2 is period 2 decision
problem)
– personal equilibrium:
• each self optimizes
• Φ(z1,d2)=s2(z1,Φ(z1,d2),d2) anticipate s2(.) choice
– Beliefs are both a source of utility and constraint
• Timeline:
– Choose from z1 X d2.
– Choose f1 from Φ.
– Choose z2
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