Questions and Answers
What does present-bias refer to?
The tendency to prioritize immediate rewards over future rewards.
What model is known as β-δ discounting?
In the β-δ discounting model, if β = 1, the model is equivalent to the ______ discounting model.
exponential
What is a characteristic of a naive agent in decision-making?
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A sophisticated agent correctly predicts their future time-inconsistency.
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What happens in the example of a student writing a paper?
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Which of the following is an experimental method used to estimate time preferences?
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Time-inconsistency can be explained by the concept of the ______ self.
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Study Notes
Present Bias
- Present bias refers to the tendency to prioritize immediate rewards over future benefits, leading to procrastination.
- A time-consistent planner would act immediately if it’s beneficial to do something next week or month.
Behavioral Model: Present-Bias
- The β − δ Discounting Model, proposed by Strotz and popularized by Laibson, adjusts the utility function to account for present bias.
- Model equation: U(c) = u(c1) + βδu(c2) + βδ²u(c3) + … + βδ^(T-1)u(cT)
- If β = 1, it aligns with the exponential discounting model; otherwise, present utility is weighted more heavily.
Example of Time-Inconsistency
- Consider two choices over three periods:
- Eating well: utility (u2 = 5, u3 = 10)
- Eating poorly: utility (u2 = 8, u3 = 6)
- With present-biased preferences (β = ½, δ = 1), choices can change over time, leading to incidents like choosing to "eat poorly" in the second period, despite a previous commitment.
Non-Discounting Models of Time Inconsistency
- Dual self: a conflict between a logical planner and impulsive doers for each time period.
- Hot vs. cold decision states influence decision-making and consistency based on context and cravings.
- Temptation preferences impact choices based on available options, which can cause perceived time inconsistency.
Procrastination in Decision Making
- When deciding on a singular task across several periods, backward induction is utilized to understand when an agent may procrastinate.
- Naive agents believe their future selves will act consistently; sophisticated agents understand their future inconsistency.
Example: Paper Writing
- A student's paper is due in four weeks, with costs associated with writing on certain weekends varying by how enjoyable the film choices are.
- Time consistency results in writing the paper progressively earlier leading up to the deadline.
Decision Tree Utilization
- Visualization of decisions helps track a student's choices across periods, shorter decision paths typically lead to later paper submission, often resulting in missing out on better movie options.
Naive vs. Sophisticated Agents
- Naive agents mistakenly believe they will behave consistently in the future, leading them to procrastinate until the last moment.
- Sophisticated agents know they are inconsistent and may compensate by acting earlier.
Measuring Time Preferences
- Experimental methods aim to estimate preference parameters (β, δ) through trade-off scenarios between different time periods.
- Willingness to pay is a typical method; subjects indicate minimal acceptable current amounts for future payments.
Multiple Price List Methodology
- Used to gauge time preference through choices between sooner and later rewards.
- The changeover point from preferring the immediate reward to the delayed reward helps calculate individual time preference parameters efficiently.
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Description
Explore the concept of present bias in this lecture from Econ 440. This session discusses the implications of procrastination and time inconsistency on decision-making. Gain insights into how present bias affects planning and behavior.
