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Questions and Answers
What is the utility of eating poorly in the first period?
What is the utility of eating poorly in the first period?
In which period does the decision-maker choose to eat poorly?
In which period does the decision-maker choose to eat poorly?
What does the 'dual self' model illustrate regarding decision-making?
What does the 'dual self' model illustrate regarding decision-making?
What is a characteristic of a naive agent in the context of time inconsistency?
What is a characteristic of a naive agent in the context of time inconsistency?
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How does tempting preference influence decision-making?
How does tempting preference influence decision-making?
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What is the cost of writing the paper in weekend 1?
What is the cost of writing the paper in weekend 1?
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If an agent has $eta < 1$, what does this signify about their consistency?
If an agent has $eta < 1$, what does this signify about their consistency?
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During a hot decision state, which is likely true about the decision-maker?
During a hot decision state, which is likely true about the decision-maker?
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What is the primary benefit of finishing the paper?
What is the primary benefit of finishing the paper?
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An agent who knows they will be time-inconsistent in the future is termed as which type?
An agent who knows they will be time-inconsistent in the future is termed as which type?
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What utility does the sophisticated agent estimate if they choose to do the paper in week 2?
What utility does the sophisticated agent estimate if they choose to do the paper in week 2?
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Which decision does the sophisticated agent make in week 3?
Which decision does the sophisticated agent make in week 3?
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In the context of the decision tree for the sophisticated agent, what happens in week 1 if they choose to wait?
In the context of the decision tree for the sophisticated agent, what happens in week 1 if they choose to wait?
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What equation represents the estimation of δ through willingness to pay in time preference measurement?
What equation represents the estimation of δ through willingness to pay in time preference measurement?
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In the Multiple Price Lists methodology, what is typically held constant while the other option varies?
In the Multiple Price Lists methodology, what is typically held constant while the other option varies?
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What is the utility of doing the paper in week 1?
What is the utility of doing the paper in week 1?
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If the agent waits until week 2, what will their expected utility for doing the paper be?
If the agent waits until week 2, what will their expected utility for doing the paper be?
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What decision does the agent make if they opt not to do the paper in week 1?
What decision does the agent make if they opt not to do the paper in week 1?
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What is the best choice for the agent in week 3 if they have not written the paper yet?
What is the best choice for the agent in week 3 if they have not written the paper yet?
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Which week has the highest utility for doing the paper?
Which week has the highest utility for doing the paper?
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How does the utility change between week 2 and week 3 for waiting to do the paper?
How does the utility change between week 2 and week 3 for waiting to do the paper?
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If the agent does not write the paper at all, what will be their utility in week 4?
If the agent does not write the paper at all, what will be their utility in week 4?
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What is the utility for doing the paper in week 2 as compared to waiting for week 3?
What is the utility for doing the paper in week 2 as compared to waiting for week 3?
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What does the decision tree illustrate regarding the agent's approach to writing the paper?
What does the decision tree illustrate regarding the agent's approach to writing the paper?
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What assumption does the naive agent incorrectly make about their future self?
What assumption does the naive agent incorrectly make about their future self?
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What utility does the naive agent perceive when choosing to wait until week 2?
What utility does the naive agent perceive when choosing to wait until week 2?
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What is the utility of writing the paper in week 3?
What is the utility of writing the paper in week 3?
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Which week does the naive agent ultimately do the paper?
Which week does the naive agent ultimately do the paper?
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What utility does the naive agent expect if they wait in week 1?
What utility does the naive agent expect if they wait in week 1?
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In week 3, the naive agent decides not to write the paper. What is their justification?
In week 3, the naive agent decides not to write the paper. What is their justification?
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What is the difference in utilities between doing the paper and waiting in week 2?
What is the difference in utilities between doing the paper and waiting in week 2?
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What consequence does the naive agent face due to their time inconsistency?
What consequence does the naive agent face due to their time inconsistency?
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Why does the naive agent continue to wait until the last moment to do the paper?
Why does the naive agent continue to wait until the last moment to do the paper?
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What does the β-δ discounting model primarily introduce to the utility function?
What does the β-δ discounting model primarily introduce to the utility function?
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In the context of present bias, what normal behavior do consistent planners exhibit?
In the context of present bias, what normal behavior do consistent planners exhibit?
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If β = 1 in the β-δ discounting model, what does this imply?
If β = 1 in the β-δ discounting model, what does this imply?
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Which of the following phrases exemplifies present bias?
Which of the following phrases exemplifies present bias?
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How does present bias contribute to time inconsistency in choices?
How does present bias contribute to time inconsistency in choices?
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In the behavioral model of present bias, what is typically true about the value assigned to the present period?
In the behavioral model of present bias, what is typically true about the value assigned to the present period?
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What is a common outcome for individuals influenced by present bias when considering future actions?
What is a common outcome for individuals influenced by present bias when considering future actions?
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What is the range of the parameter β in the β-δ discounting model?
What is the range of the parameter β in the β-δ discounting model?
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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.
