Lecture 3

Question 1

Intertemporal Choice?

Answer 1

costs & benefits of

a decision are separated across time.

Question 2

Self-control problems? (2)

Answer 2

Temptation (fun now, pay later)

Procrastination (pain is now, gain comes later)

Question 3

Temptation as defined by behavioral economics?

Answer 3

consumer preferences are inconsistent across time and context.

(avoid dessert tonight -> I want dessert -> I regret eating dessert)

Question 4

Brain area associated with system 1? With system 2?

Answer 4

limbic system v parietal cortex/Prefrontal cortex

Question 5

Delay discounting?

Answer 5

how large a premium an individual will place on enjoyment nearer in time over delaying gratification

(less enjoyment of eating the marshmallow if we are forced to wait)

Question 6

Classic Exponential discounting model

as rate increases?

Answer 6

δ(t) = (1/(1+r)^t)
δ - discount factor
r - discount rate
t - time interval

As r increases, d(t) decreases

Question 7

Classic Discounting model caveats

Answer 7

1) Rate changes based on form of consumption
2) rate isn’t stationary
3) People do not apply the same discount rate to all periods in the
future
4) Present bias

Question 8

Present bias - definition?

Answer 8

mmediately available rewards
have a disproportionate impact on preferences relative to
more delayed rewards

Question 9

Hyperbolic discount rates - qualitative explanation?

Answer 9

system 1
applies much higher discount rates to time periods in the immediate
future, while system 2 applies lower rates to periods further away.

Question 10

Hyperbolic discount rates - formula?

Beta values?
When B<1?

Answer 10

U(t) = 𝛽*δ(t)

0 to 1.0

𝛽 < 1,then the person gives less weight to all future time
periods relative to the present

Question 11

effect of scarcity on temporal events?

Answer 11

people become much more

present-focused.

Question 12

Ways to overcome present bias?

Answer 12

1. Implementation prompts
2. Temptation bundling
3. Reducing empathy gaps between present self &
   future self (VR?)
4. Nudges and default options
5. Commitment devices

Question 13

who are suitable candidates for nudges (default options)?

who are suitable candidates for pre-commitment devices?

Answer 13

people are unaware of their tendency to procrastinate or fall prey to temptation.

those who are self-aware of their tendency to procrastinate/become tempted

Question 14

Examples of pre-commitment for smoking cessation?

Answer 14

1. Set a quit date.
2. Get rid of smoking paraphernalia.
3. Announce your intention to family/friends

Question 15

Pre-commitments for FUTURE behaviors?

Answer 15

1. Forestalling temptation (anabuse)
2. Deposit contracts (pay a deposit that you get back if you do something good - like go to the dentist)
   3) Locking in your future self to a maximum usage amount (ex tobacco purchase license)