1. Behavioral Economics

2. 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

3. Exponential Discounting
Impatience

4. 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

5. Present-Biased Discounting
Impatience

6. 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

7. 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

8. 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

9. 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

10. Total Savings and Investments Reported by Workers in 2015
Impatience

11. 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, Retirement Confidence Surveys
Impatience

12. 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

13. 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