1. Intertemporal Choice Keith Ericson and David Laibson August 25, 2016
Handbook of Behavioral Economics
Stanford Conference

2. Outline Present-focused models: theoretical commonalities
Empirical Regularities
Open Questions and Puzzles

3. I. Present Focused Models
Hyperbolic discounting and present bias
Strotz (1955), Herrnstein (1961), Phelps and Pollak (1967), Ainslie (1974), Akerlof (1991), Loewenstein and Prelec (1992), Laibson (1997), O’Donoghue and Rabin (1999), Harris and Laibson (2001, 2013), Benhabib, Bisin and Schotter (2010)
One self temptation models
Baumeister et al (1998), Muraven and Baumeister (2001), Gul and Pesendorfer (2001), Laibson (2001), Bernheim and Rangel (2004), Dekel, Lipman and Rustichini (2009)
Dual-self models
Smith (1775), Thaler and Shefrin (1981), Shefrin and Thaler (1988), Loewenstein (1996), Loewenstein and O’Donoghue (2004), Fudenberg and Levine (2006, 2011), Brocas and Carrillo (2008a, 2008b, 2012), Jackson and Yariv (2014, 2015).
Psychometric distortions (e.g., log time perceptions) and heuristics
Read (2001), Zauberman et al (2009), Read et al (2011, 2013), Ericson et al (2015)
Myopia
Gabaix and Laibson (2016)

4. David Hume (1738 – A Treatise of Human Nature)
“In reflecting on any action, which I am to perform a twelve-month hence, I always resolve to prefer the greater good, whether at that time it will be more contiguous or remote; nor does any difference in that particular make a difference in my present intentions and resolutions. My distance from the final determination makes all those minute differences vanish, nor am I affected by any thing, but the general and more discernible qualities of good and evil. But on my nearer approach, those circumstances, which I at first over-looked, begin to appear, and have an influence on my conduct and affections. A new inclination to the present good springs up, and makes it difficult for me to adhere inflexibly to my first purpose and resolution. This natural infirmity I may very much regret, and I may endeavour, by all possible means, to free my self from it. I may have recourse to study and reflection within myself; to the advice of friends; to frequent meditation, and repeated resolution: And having experienced how ineffectual all these are, I may embrace with pleasure any other expedient, by which I may impose a restraint upon myself, and guard against this weakness."

5. Plato (“Socrates” Phaedrus sections 246a–254e)
A person is a charioteer pulled by two horses with different personalities:
“one of the horses is noble and of noble breed, but the other quite the opposite in breed and character. Therefore in our case the driving is necessarily difficult and troublesome.”

6. Adam Smith (1759 – The Theory of Moral Sentiments)
Conflicting motivational systems: “impartial spectator” and the “passions”
See Ashraf et al (2005), who call Smith the first behavioral economist

7. I. Present Focused Models
Hyperbolic discounting and present bias
Temptation models
Dual-self models
Psychometric distortions
Myopia
Models are hard to pull apart empirically (e.g., Krusell et al. 2010; Gabaix and Laibson 2016)
They share the unifying feature of giving priority to the present.
High short-run discount rates.
Temptation effects that arise when choosing among current feasible rewards, but not to the selection of choice sets that will determine the feasibility of future rewards.
A relatively myopic self/system that influences choices that determine immediate rewards, but does not influence choices for the future.
Present time steps are “bigger” than future time-steps
The present is easier to “forecast” than the future

8. One source of differentiation: naivite
Naivite (or partial naivite) can be applied to these models.
Sometimes makes no difference (ln utility eat-the-pie problem)
Sometimes makes an enormous difference (O’Donoghue and Rabin 1999).

9. Models without present focus
Habit formation models (motive to tilt consumption paths upwards): e.g., Ryder and Heal (1973), Abel (1990)
Anticipation models: e.g., Loewenstein (1987), Caplin and Leahy (2001)
Fixed cost of delay models: Kable and Glimcher (2010)
Focusing effects: Koszegi and Szeidel (2013)

10. II. Empirical regularities
High required rate of return (RRR) for money
High(er) RRR for consumption
Lack of liquidity on household balance sheets
Preference reversals
Procrastination
Naivite
Small changes in transactions costs have large consequences
Commitment
Paternalistic policies

11. High required rate of return (RRR) for money
Experimental literature I: Maital and Maital (1977); Thaler (1981); Loewenstein & Thaler (1989); Prelec & Loewenstein (1991); Kirby (1997); Kirby and Herrnstein (1995); Read and Roelofsma (2003); Benhabib, Bisin, and Schotter (2010); Hardisty et al. (2011); Manzini, Mariotti, and Mittone (2014); Harrison, Lau, and Williams (2002).
Experimental literature II: adjustments for curvature substantially lower the estimated discount rate: e.g., Andreoni and Sprenger (2012a, 2012b); Andersen, Harrison, Lau, and Rutström, (2008), Halevy (2014, 2015); Andreoni, Kuhn, and Sprenger (2015);
Field data:
Hausman (1979) – but do they understand the tradeoff?
Warner and Pleeter (2001) – but confounded by service requirement
Coile et al. (2002) – Social Security claiming (again knowledge confound)
Unstable findings (e.g., fuel efficiency): Dreyfus and Viscusi (1995) and Allcott and Wozny (2012) vs. Busse, Knittel, and Zettelmeyer (2013).

12. 1. High required rate of return (RRR) for money
High RRR
Overall, relatively little present bias (when use FED methodology)
Adjusting for curvature in the utility function reduces RRR
But the money-earlier-or-later (MEL) literature raises fundamental methodological questions (see Chabris et al 2008).
In theory, we aren’t supposed to be able to infer time preferences from RRR on money flows because money flows aren’t incremental utility flows
People don’t instantly consume everything they receive on the day of receipt as non-durables (e.g., estimate a daily MPC of less than 5%).
We’ll come back to this in the open questions section

13. 2. High(er) RRR for real rewards
Read rewards (time-yoked) yield high RRR, and when structurally analyzed, high discount rates and robust present bias. Many papers compare implied RRR for real rewards with money rewards and find that the RRR for real rewards are higher. Mischel et al (1970, 1989), Angeletos et al (2001), Read and van Leeuwen (1998), Read, Loewenstein, and Kalyanaraman (1999), McClure et al. (2007), Reuben, Sapienza, and Zingales (2010) , Augenblick, Niederle, and Sprenger(2015), Laibson, Maxted, Repetto, and Tobacman(2016), Bisin and Hyndman (2014), Odum, Baumann, and Rimington (2006), Odum and Rainaud (2003), Estle et al. (2007), Tsukayama and Duckworth (2010), Ubfal (2013), Lawyer et al. (2010), Shapiro (2005), Mastroubuoni and Weinberg (2009), Viscusi and Moore (1989), Della Vigna and Paserman (2005), Ben Halima and Ben Halima (2009), Paserman (2008)

14. 3. Lack of liquidity on household balance sheets and implications thereof
Low liquidity and high debt: Angeletos et al (2001); Laibson, Maxted, Repetto, and Tobacman (2016); Skiba and Tobacman (2014); however see Kaplan and Violante (2014) for an alternative perspective.
High marginal propensity to consume (MPC): Stephens (2003), Mastrobuoni and Weinberg (2009), Shapiro and Slemrod (2003), Parker et al. (2013), Broda and Parker (2014), Shapiro (2005), Mastrobuoni and Weinberg (2009), Ganong and Noel (2016), Gross, Notowidigdo, Wang (2016)
But see Aguiar and Hurst (2004) for a countervailing view; though they have recently been critiqued by Stephens and Toohey (2016)

15. 4. Preference reversals Read and Van Leeuwen (1998)
Read, Loewenstein and Kalyanaraman (1999)
Augenblick, Niederle, and Sprenger (2015)
Milkman, Rogers, and Bazerman (2009)
Dellavigna and Malmendier (2004, 2006)
Kuchler (2016)
Fedyk (2016)

16. 5. Procrastination Ariely and Wertenbroch (2002)
Choi, Laibson, Madrian, and Metrick (2002)
Dellavigna and Malmendier (2004, 2006)
Bisin and Hyndman (2014)
Reuben, Sapienza, and Zingales (2015)

17. 6. (Partial) Naivite Dellavigna and Malmendier (2004, 2006)
Kuchler (2016)
Augenblick and Rabin (2016)
Fedyk (2016)

18. 7. Small changes in transactions costs have large consequences
Choice architecture literature (e.g., Madrian and Shea 2002).
Bettinger, Long, Orepoulos, Sanbonmatsu (2012) on FAFSA simplification, Pallais (2015) on $6 reduction in sending test score
Take up of social benefits: Currie (2006), Aizer (2007) in Medicaid, Bahargava and Manoli (2015)
Planning prompts (Milkman et al. 2013)
Pick up of HIV tests (Thornton 2008)

19. 8. Commitment
Commitment: choice set reduction that has no external strategic benefit.
In the laboratory, commitment can be induced: Wertenbroch (1998); Ariely and Wertenbroch (2002); Bisin and Hyndman (2014); Karlan, Gine and Zinman (2010); Ashraf et al (2006) and Kaur, Kremer, and Mullainathan (2010); Houser, Schunk, Winter, and Xiao (2010); Royer, Stehr, and Sydnor (2012); Beshears et al (2014); Augenblick, Niederle, and Sprenger (2015); Schilbach (2015); for a review see Bryan, Karlan and Nelson (2010).
However, the willingness to pay for commitment is quite low.
And the fraction committing is sometimes quite low. Ariely and Wertenbroch (2002); Augenblick, Niederle, and Sprenger (2015); and Beshears et al (2014) are exceptions.

20. 9. Paternalistic policies
Social Security (Feldstein 1985, Beshears et al 2016)
EITC (Lockwood, 2016)
Defined contribution savings plans (Laibson et al 1997)
Compulsory education
Usury laws
Most of these laws could be interpreted as paternalistic control of others, rather than a preference for commitment: Fedyk (2016).

21. III. Puzzles and Open Questions
Impatience over monetary flows instead of consumption
Multiple mechanisms, including probability weighting
Negative discounting
Heterogeneity and domain generality
Duration of the present
What is tempting
Missing commitment
Retirement saving adequacy
Measuring temptation
Malleability and self-management
Welfare and policy
Alternative psychological conceptions

22. 1. Impatience over monetary flows instead of consumption
Critical of money-earlier vs. later (MEL)
Coller and Williams (1999), Cubitt and Read (2007), Chabris et al (2008), Epper, Fehr-Duda, and Bruhin (2011), Augenblick, Niederle, and Sprenger (2015), Ericson et. al (2015), Cohen et al (2016), Reuben, Sapienza, and Zingales (2015)
Assume that choices in MEL experiments are equivalent to choices over time-dated utility flows
Thaler (1981); Kirby and Herrnstein (1995); Loewenstein and Prelec (1999); Andersen et al 2008, Benhabib et al. 2010, Halevy 2014, 2015).
Other mechanisms at play in the MEL literature: trust, risk, probability weighting, or heuristics (see next slide).

23. 2. Multiple mechanisms, including probability weighting
Risk and probability weighting: Souzou (1998), Dasgupta and Maskin (2005), Halevy (2008), Epper, Fehr-Duda, and Bruhin (2011), Saito (2011), and Andreoni and Sprenger (2012b); Anderson and Stafford (2009)
Trust and Forecasting Beliefs: Alternative interpretations of the marshmallow task (see McGuire and Kable 2013).
Heuristics: Read et al (2012, 2013); Ericson et al (2015)

24. 3. Negative discounting (wrt long-run sequences)
Barsky et al, (1997): subjects prefer a flat or rising slope of the real consumption path when the real interest rate is zero.
For a review see Loewenstein and Prelec (1993).
See also Loewenstein and Sicherman (1991) and Bhatia et al (2016).
Mechanisms:
Habits: Ryder and Heal (1973), Abel (1990)
Reference points:
Anticipation: Loewenstein (1987); Caplin and Leahy (2001)

25. 4. Heterogeneity and domain generality
Mischel et al (1970, 1989): marshmallow test is correlated (0.16) with personality scales that are designed to measure self-regulatory capacity
Reuben, Sapienza, and Zingales (2010) (R2=0.12); Harrison, Lau and Ruström (2010); Benjamin et al (2016); Meier and Sprenger (2013) ; Tanaka et al (2010); Cadena and Keys (2011); Bettinger and Slonim (2007); Sutter et al. (2013); Castillo et al. (2011); Golsteyn, Gronqvist and Lindahl (2013) ; Daly, Delaney, and Harmon (2009); Becker et al. (2012); Wolbert and Riedl (2013); Dohmen et al. (2010); Benjamin, Brown and Shapiro (2013); Burks et al. (2009); Chabris et al (2008); Falk et al. (2015); Chapman (1996)
Kirby (2009) and Meier and Sprenger (2010) – test re-test reliability of 0.4 to 0.8
Variation with SES: Lawrance (1991); Viscusi and Moore (1989); Meier and Sprenger (2010); Laibson, Repetto, and Tobacman (2001)
Age-based effects in theory: Robson and Samuelson (2009)

26. 5. Duration of the present
McClure et al (2007): 10 minute delay (of juice) not “now”,
McClure et al (2004): money today (but more than 1 hour delayed) is “now”.

27. 6. What is tempting?

28. 7. Missing commitment
Is it missing? Mortgage? 401(k)? Social Security? (crowd out?)
Exceptions? Internet blocking software (that few people use); personal trainers (that few people can afford or use).
Why is there not a successful market selling commitment for commitment’s sake?
Laibson (2015): cost, naivite, option value jointly kill commitment?

29. 8. Retirement saving adequacy
Scholz , Seshadri , Khitatrakun  (2006)
Munnell et al (2012, 2013, 2015)
Aguiar and Hurst (2004) vs. Stephens and Toohey (2016)
Skinner (2006)
Laibson and Yadlon (2016)

30. 9. Measuring temptation Toussaert (2016)
Sadoff, Samek, Sprenger (2016)

31. 10. Malleability and self-management
Growth mindset (Dweck et al)
Grit (Duckworth et al)
Pre-school interventions (Heckman)

32. 11. Welfare and policy
Normative discount functions both intra- and inter-generational: Sen (1957), Schelling (1995), Gollier (2012)
Climate change: Stern (2007) and Goulder and Williams (2012)
Welfare criteria vis-à-vis intertemporal choice? Laibson et al (1997); Beshears et al (2008); Bernheim and Rangel (2008)

33. 12. Alternative and/or complementary psychological conceptions
Grit
Construal Theory and Query Theory
Conscientiousness and other personality constructs
Ego depletion
Multiple systems
Psychologists take discounting for granted and have turned their attention to inter-personal and situational sources of variation; especially interventions that (persistently) improve self-regulation

34. Outline Present-focused models: theoretical commonalities
Empirical Regularities
Open Questions and Puzzles

35. I. Present Focused Models
Hyperbolic discounting and present bias
Temptation models
Dual-self models
Psychometric distortions (e.g., log time perceptions)
Myopia

36. II. Empirical regularities
High RRR for money
Lack of liquidity on household balance sheets
High RRR for consumption
Preference reversals
Procrastination
Naivite
Small changes in transactions costs have large consequences
Commitment
Paternalistic policies

37. III. Puzzles and Open Questions
Impatience over monetary flows instead of consumption
Multiple mechanisms, (e.g., probability weighting)
Negative discounting
Heterogeneity and Domain generality
Duration of the present
What is tempting
Missing commitment
Retirement saving adequacy
Measuring temptation
Malleability and self-management
Welfare and policy
Alternative psychological conceptions