Behavioral Economics
Present Biased Discounting Exercise Decisions Discounted Benefits vs. Discounted Costs No Discounting Discounting Present Biased Discounting Today? Yes 16 vs. 12 Plan to do so tomorrow? Will do it tomorrow when tomorrow arrives? Impatience www.EconEdLink.org
Exponential Discounting Impatience www.EconEdLink.org
Present Biased Discounting Exercise Decisions Discounted Benefits vs. Discounted Costs No Discounting Discounting Present Biased Discounting Today? Yes 16 vs. 12 No 8 vs. 12 Plan to do so tomorrow? 4 vs. 6 Will do it tomorrow when tomorrow arrives? Impatience www.EconEdLink.org
Present-Biased Discounting Impatience www.EconEdLink.org
Present Biased Discounting Exercise Decisions Discounted Benefits vs. Discounted Costs No Discounting Discounting Present Biased Discounting Today? Yes 16 vs. 12 No 8 vs. 12 Plan to do so tomorrow? 4 vs. 6 8 vs. 6 Will do it tomorrow when tomorrow arrives? Impatience www.EconEdLink.org
Principles of Behavioral Economics Part A: Imagine you could choose between receiving $300 immediately or another amount 6 months from now. How much would the future amount need to be to make it as attractive as receiving $300 immediately? Please write the dollar amount that would make the following options equally attractive: Receive $300 immediately Receive $________ in 6 months Impatience www.EconEdLink.org
Principles of Behavioral Economics Part B: Imagine you could choose between receiving $300 immediately or another amount 1 year from now. How much would the future amount need to be to make it as attractive as receiving $300 immediately? Please write the dollar amount that would make the following options equally attractive: Receive $300 immediately Receive $________ in 1 year Impatience www.EconEdLink.org
How Humans Discount Future Values Exponential discounting: People value things less the further into the future they occur. Some people may discount the future by a lot – they are impatient. Present biased discounting: People discount anything received in the future relative to today by a constant amount. This type of discounting can result in people planning to do something in the future but changing their mind when the time arises. In practice, both types of discounting are observed. Impatience www.EconEdLink.org
Total Savings and Investments Reported by Workers in 2015 Impatience www.EconEdLink.org
Total Savings and Investments Percentage By Age Less than $1,000 $1,000 - $9,999 $10,000-$24,999 $25,000-$49,999 $50,000-$99,999 $100,000-$249,000 Over $250,000 25-34 34 23 20 8 7 5 4 35-44 18 12 10 16 13 45-55 21 14 55+ 11 9 25 Source: Employee Benefit Research Institute and Greenwald and Associates, 2004-2015 Retirement Confidence Surveys Impatience www.EconEdLink.org
Save More Tomorrow Savings Rates of Participants Who: Initially After First Pay Raise Second Pay Raise Third Pay Raise Fourth Pay Raise Declined Financial Advice 6.6 6.5 6.8 6.2 Took Consultant’s Recommended Saving Rate 4.4 9.1 8.9 8.7 8.8 Joined “Save More Tomorrow” Plan 3.5 9.4 11.6 13.6 Impatience www.EconEdLink.org
Comparing Econs and Humans Lesson Econs Humans 1 Use system 2 for all their decisions. Use system 1 to make many routine decisions. Carefully weigh costs and benefits to make decisions. Make decisions on past experience or quick judgments. 2 Are not subject to cognitive biases when making decisions. Are subject to cognitive biases when making decisions and so may use anchors and fall into relativity traps. 3 Make decisions by weighing costs and benefits equally. Tend to weigh losses greater than gains. Are not influenced by their current situation when making decisions. Tend to bias to the default or to things they already have. 4 May discount costs and benefits that occur in the future. May have self-control problems and discount the future too much or be subject to present bias, causing inconsistent decisions. 5 Only use costs and benefits to make decisions. May make decisions based on fairness or for other emotional factors such as whether work is meaningful. Impatience www.EconEdLink.org