Behavioral insights into intertemporal choices, self-control issues and the virtues of commitment

Part 1

“Oh no, I did it again. My chocolate supply vanished into thin air. Okay, okay, not into the air, but into my belly. I just don’t get it. When it comes to sweets, I just cannot control myself.

I’m not a fool, I do know that devouring an entire bar of chocolate a day isn’t good for me in the long run. Strangely enough though, this happens every time I buy some. Why on earth can I not stick to my plans and just eat two pieces a day?!

Seems like “future me’ is a different version of “present me’ and dislikes performing my initial plans. What’s wrong with me?’

Well, from a behavioral economist’s point of view, the diagnose is that you suffer from time-inconsistency and a projection bias. But you’re not alone. Time-inconsistency is very common among humans, and there are remedies to cure it.

In this and in the following blog posts, we will explain the underlying behavioral patterns, and we will show you some measures to deal with the chocolate self-delusion.

Let’s start by structuring the problem.

The intertemporal choice problem

Every day we face decisions which will affect our future. These decisions are called intertemporal choices. Further examples besides diet are:

• choosing to spend money now or save it for later
• deciding whether to work hard now to enjoy your leisure time later or to enjoy another cup of coffee first
• considering forgoing pay now to attain a college degree which will enable you to reap higher salaries later

In intertemporal choices, some options have immediate benefits and deferred costs: if I go out to dinner with friends tonight although there is still work to do, I will have fun now but will suffer from extra stress tomorrow. Other options have immediate costs and deferred benefits: saving for retirement cuts into my budget now but will improve life quality later.

Let us consider the chocolate example again under these aspects. We have two options:

1. Eating two pieces a day
2. Eating the whole bar of chocolate at once

Option 1 has immediate costs and deferred benefits. Eating only two pieces of chocolate satisfies us a bit now but benefits us in the future as we are less susceptible to obesity related diseases (we have a bite each day and do not consume too many calories).

Option 2 has immediate benefits and deferred costs. Eating the whole bar of chocolate at once yields large satisfaction now but will probably lead to regret in the future. Suddenly all chocolate is gone, so of course we refill our stocks. Then it starts all over again, and due to repeated overeating, we will possibly gain weight and will be in poor health.

Time-inconsistent decision making

It seems obvious that option 1 (eating two pieces a day) is healthier than 2 (eating all chocolate at once), and occasionally there are amazingly self-controlled persons who consistently choose 1. These people behave fully rational and their preferences do not change over time (in economic terms: they have well-behaved preferences).

Most of us, however, seem to suddenly prefer 2 to 1 once the chocolate is there for no other reason than passing of time. There is a discrepancy between what you prefer your future self to do and what your future self prefers to do. This is called time-inconsistent decision making.

But again, this is not an uncommon behavior. We all tend to do what feels good now in contrast to what would be good for us in the future. Strangely, costs we face right now seem always higher than future costs. The reason is that we discount future benefits differently with the length of time we spend waiting. We put more weight on actions which benefit our current selves, and less weight onto those which benefit us in the future.

So, in option 1, present costs (not eating more chocolate) seem way more severe than future costs (higher susceptibility for obesity-related health problems). The smaller-sooner option (eating chocolate) is more attractive as the larger-later option in 2.

Put differently, we tend to underestimate the benefits of choices which consequences manifest in the future. The more distant these consequences are from the present, the less we take them into account.

At bottom, time-inconsistent decision makers pursue immediate gratification. They wish prospectively to make far-sighted actions in the future, but when the future arrives, they will behave against their earlier wishes, pursuing a smaller-sooner option rather than a larger-later one. It is obvious that people behaving in this manner face a self-control problem.

In Part 2 , we identify different types of time-inconsistent decision-makers and further explore the underlying mechanism.

 

About the authors

Julia Hafenrichter is currently completing her master’s thesis on the implementation of Behavioral Economics in Public Policy at University of Passau.

Julia Stauf is Director at BEHAVIA and holds a PhD in Behavioral and Experimental Economics from Cologne University.

Contact: info@behavia.de