ECON 440: Lecture 9 - Present Bias

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Questions and Answers

What is the utility of eating poorly in the first period?

7 (correct)

7.5

In which period does the decision-maker choose to eat poorly?

Neither Period

Both Periods

Period 2 (correct)

Period 1

What does the 'dual self' model illustrate regarding decision-making?

Conflicts arise between a rational planner and impulsive doers. (correct)

Doers always reflect the planner's decisions.

All actors are equally rational.

A single planner makes all decisions.

What is a characteristic of a naive agent in the context of time inconsistency?

They assume they will be consistent in future decisions. Signup and view all the answers

How does tempting preference influence decision-making?

It affects preferences based on the available options. Signup and view all the answers

What is the cost of writing the paper in weekend 1?

3 Signup and view all the answers

If an agent has $eta < 1$, what does this signify about their consistency?

They are definitely time-inconsistent. Signup and view all the answers

During a hot decision state, which is likely true about the decision-maker?

They lose control over their cravings. Signup and view all the answers

What is the primary benefit of finishing the paper?

Receiving a grade after submission. Signup and view all the answers

An agent who knows they will be time-inconsistent in the future is termed as which type?

Sophisticated agent Signup and view all the answers

What utility does the sophisticated agent estimate if they choose to do the paper in week 2?

$21ar{v} - 5$ Signup and view all the answers

Which decision does the sophisticated agent make in week 3?

Do the paper Signup and view all the answers

In the context of the decision tree for the sophisticated agent, what happens in week 1 if they choose to wait?

They will be forced to complete the paper in week 2 Signup and view all the answers

What equation represents the estimation of δ through willingness to pay in time preference measurement?

$Y = rac{100}{δ}$ Signup and view all the answers

In the Multiple Price Lists methodology, what is typically held constant while the other option varies?

The smaller, sooner reward Signup and view all the answers

What is the utility of doing the paper in week 1?

$ar{v} - 3$ Signup and view all the answers

If the agent waits until week 2, what will their expected utility for doing the paper be?

$ar{v} - 8$ Signup and view all the answers

What decision does the agent make if they opt not to do the paper in week 1?

They will wait until week 3 to write it. Signup and view all the answers

What is the best choice for the agent in week 3 if they have not written the paper yet?

To wait and write the paper later for utility $ar{v} - 8$. Signup and view all the answers

Which week has the highest utility for doing the paper?

Week 1 Signup and view all the answers

How does the utility change between week 2 and week 3 for waiting to do the paper?

Decreases by 5. Signup and view all the answers

If the agent does not write the paper at all, what will be their utility in week 4?

There will be no utility. Signup and view all the answers

What is the utility for doing the paper in week 2 as compared to waiting for week 3?

Higher utility in week 2. Signup and view all the answers

What does the decision tree illustrate regarding the agent's approach to writing the paper?

The agent's decisions are based on maximizing utility each week. Signup and view all the answers

What assumption does the naive agent incorrectly make about their future self?

That their future self will be time-consistent Signup and view all the answers

What utility does the naive agent perceive when choosing to wait until week 2?

$1ar{v} - 4$ Signup and view all the answers

What is the utility of writing the paper in week 3?

$21ar{v} - 8$ Signup and view all the answers

Which week does the naive agent ultimately do the paper?

Week 4 Signup and view all the answers

What utility does the naive agent expect if they wait in week 1?

$1ar{v} - 2.5$ Signup and view all the answers

In week 3, the naive agent decides not to write the paper. What is their justification?

They think they will write it in week 4 instead Signup and view all the answers

What is the difference in utilities between doing the paper and waiting in week 2?

$21ar{v} - 5 - (1ar{v} - 4)$ Signup and view all the answers

What consequence does the naive agent face due to their time inconsistency?

They miss out on social activities like seeing a movie Signup and view all the answers

Why does the naive agent continue to wait until the last moment to do the paper?

They assume they will be more motivated later Signup and view all the answers

What does the β-δ discounting model primarily introduce to the utility function?

Additional discounting for all future periods through a bias towards the present Signup and view all the answers

In the context of present bias, what normal behavior do consistent planners exhibit?

They would choose to complete tasks in the moment if beneficial. Signup and view all the answers

If β = 1 in the β-δ discounting model, what does this imply?

The model becomes the same as the exponential discounting model. Signup and view all the answers

Which of the following phrases exemplifies present bias?

I will exercise tomorrow instead of today. Signup and view all the answers

How does present bias contribute to time inconsistency in choices?

By enhancing the perceived value of immediate rewards at the expense of future planning. Signup and view all the answers

In the behavioral model of present bias, what is typically true about the value assigned to the present period?

It receives additional weight compared to future utility due to present bias. Signup and view all the answers

What is a common outcome for individuals influenced by present bias when considering future actions?

They consistently choose immediate actions over delayed benefits. Signup and view all the answers

What is the range of the parameter β in the β-δ discounting model?

0 ≤ β ≤ 1 Signup and view all the answers

Study Notes

Present Bias

Present bias refers to a discrepancy in how people value immediate rewards over future rewards.
People with present bias consistently choose smaller, immediate rewards over larger, delayed rewards, despite knowing the larger reward would offer higher long-term benefit.

The Behavioral Model: Present-Bias

The model incorporates the concept of present bias by modifying the standard exponential discounting model.
This model, known as β-δ discounting, introduces a "present bias" parameter, β, which represents the additional discount applied to future periods.
When β equals 1, the model reduces to the standard exponential discounting model.
However, for β less than 1, present bias emerges, giving a relative boost to the current period's utility over future periods.

Example: How Present-Bias Leads to Time-Inconsistency

Time inconsistency occurs when an individual's preferences change over time, leading to different decisions made in the present compared to past or future selves.
Present bias can cause time inconsistency, as the immediate temptation to eat poorly may lead to a different choice in the present period versus a future period when the same reward is considered more objectively.

Other Explanations of Time Inconsistency

Dual self model proposes a "planner" and multiple "doers."
Time Inconsistency can arise if "doers" are solely driven by present gratification, making decisions at odds with the planner's long-term goals.

Non-Discounting Models of Time Inconsistency

Hot and Cold decision states: People make different choices depending on their emotional or "hot" state, often driven by immediate gratification impulses.
Temptation preferences: Individuals value not just consumption but the available options.

The Behavioral Model: Examples

Procrastination: Individuals face the burden of completing a task within a deadline with multiple choices of when to do it.
Analyzing such decisions requires backward induction, starting from the end and working backward.

Example: Paper Writing

This example depicts a student who needs to write a paper within four weekends.
Each weekend carries a cost of missing out on a movie that increases with each passing week.
The decision to write the paper is influenced by time preferences, particularly whether the individual is time-consistent, naïve, or sophisticated.

Measuring Time Preferences

Researchers employ experiments to estimate both aggregate and individual-level time preferences.
These experiments focus on trade-offs between rewards in different time periods.

Measuring β-δ Preferences

By analyzing how individuals trade off smaller sooner rewards for larger later rewards, researchers can estimate the β and δ parameters.

More Details on Multiple Price List Methodology

This method is commonly used for estimating individual time preferences.
Participants are presented with choices involving varying combinations of smaller sooner and larger later rewards.
The point where an individual switches preferences reveals their time preferences.
It's crucial to have choices with both immediate and delayed rewards to separately identify β and δ.

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Description

Explore the concept of present bias and its implications in behavioral economics. This quiz covers the β-δ discounting model and how present bias affects decision-making over time. Test your understanding of time inconsistency and the valuation of immediate versus delayed rewards.