Self-control and economic decisions

Question 1

Standard time discounting

Answer 1

People weigh future probabilities by an exponentially declining discounting factor d(t) = 8^t

Question 2

Hyperbolic time discounting

Answer 2

1. Basically standard one bit with an immediacy effect = ß8^t
2. People will make far-sighted decisions when planning in advance but actually short-sighted when costs/benefits are immediate - This is a dynamic inconsistency in inter temporal choice
3. Because you start over from the point you are actually making the decision! Your discounting factor for decision x at t1 is not the same than at t2!

Question 3

Childhood self-control study

Answer 3

1. Self-control predicted wealth, health and criminal behaviour
2. Especially true for extremes
3. Improvement of self-control led to better outcomes
4. Solutions:
   - Opt-out schemes for saving, eating healthy…
   - One-two push interventions in (1) childhood to enhance self-control and (2) adolescence to prevent/mitigate mistakes

Question 4

Save More Tomorrow Program features

Answer 4

1. Offered a while before future pay increase - Make use of hyperbolic time discounting
2. Plan is increased beginning with 1st pay check - To prevent loss-aversion
3. Plan continues to increase after every raise - To prevent status quo bias / Inertia
4. Employee can stop at any time - More comfortable to join

Question 5

Who don’t people save on their own?

Answer 5

1. Difficult to compute
2. Lack of self-control
3. Procrastination