Doing It Now or Later
01 Mar 1999-The American Economic Review (American Economic Association)-Vol. 89, Iss: 1, pp 103-124
TL;DR: O'Donoghue et al. as discussed by the authors presented a model for hyperbolic discounting with the concept of doing it now or later (Doing It Now or Later).
Abstract: UNIVERSITY OF CALIFORNIA A T B E R K E L E Y Department of Economics Berkeley, California 94720-3880 Working Paper No. 97-253 Doing It Now or Later Ted O'Donoghue Center for Mathematical Studies in Economic and Management Sciences Northwestern University and Matthew Rabin Department of Economics University of California, Berkeley January 1997 Key words: doing it, hyperbolic discounting, preproperation, procrastination, time inconsistency JEL Classification: A12, B49, C70, D l l , D60, D74, D91, E21 We thank Steven Blatt, Erik Eyster, and Clara Wang for useful research assistance, and Steven Blatt, Erik Eyster, David Laibson, and seminar participants at UC Berkeley, Northwestern, Russell Sage Foundation, Columbia, Yale and Harvard/MIT for helpful comments. O'Donoghue thanks the Alfred P. Sloan Foundation and Rabin thanks the Alfred P. Sloan and Russell Sage Foundations for financial support.
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Book•
01 Jan 2003TL;DR: In this paper, the authors describe the new generation of discrete choice methods, focusing on the many advances that are made possible by simulation, and compare simulation-assisted estimation procedures, including maximum simulated likelihood, method of simulated moments, and methods of simulated scores.
Abstract: This book describes the new generation of discrete choice methods, focusing on the many advances that are made possible by simulation. Researchers use these statistical methods to examine the choices that consumers, households, firms, and other agents make. Each of the major models is covered: logit, generalized extreme value, or GEV (including nested and cross-nested logits), probit, and mixed logit, plus a variety of specifications that build on these basics. Simulation-assisted estimation procedures are investigated and compared, including maximum simulated likelihood, method of simulated moments, and method of simulated scores. Procedures for drawing from densities are described, including variance reduction techniques such as anithetics and Halton draws. Recent advances in Bayesian procedures are explored, including the use of the Metropolis-Hastings algorithm and its variant Gibbs sampling. No other book incorporates all these fields, which have arisen in the past 20 years. The procedures are applicable in many fields, including energy, transportation, environmental studies, health, labor, and marketing.
7,768 citations
Cites background or methods from "Doing It Now or Later"
...The procedures for modeling these decisions were first developed for various applications by, for example, Wolpin (1984) on women’s fertility, Pakes (1986) on patent options, Wolpin (1987) on job search, Rust (1987) on engine replacement, Berkovec and Stern (1991) on retirement, and others....
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...For example, O’Donoghue and Rabin (1999), among others, argue that people are time-inconsistent: when it is Monday, we weigh the benefits and costs that will come on, say, Wednesday only marginally more than those that will arrive on Thursday, and yet when Wednesday actually arrives, we weigh Wednesday’s (today’s) benefits and costs far more than Thursday’s....
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TL;DR: In this paper, the authors discuss the discounted utility (DU) model, its historical development, underlying assumptions, and "anomalies" -the empirical regularities that are inconsistent with its theoretical predictions.
Abstract: This paper discusses the discounted utility (DU) model: its historical development, underlying assumptions, and "anomalies" - the empirical regularities that are inconsistent with its theoretical predictions. We then summarize the alternate theoretical formulations that have been advanced to address these anomalies. We also review three decades of empirical research on intertemporal choice, and discuss reasons for the spectacular variation in implicit discount rates across studies. Throughout the paper, we stress the importance of distinguishing time preference, per se, from many other considerations that also influence intertemporal choices.
5,242 citations
TL;DR: The authors examined the neural correlates of time discounting while subjects made a series of choices between monetary reward options that varied by delay to delivery and demonstrated that two separate systems are involved in such decisions.
Abstract: When humans are offered the choice between rewards available at different points in time, the relative values of the options are discounted according to their expected delays until delivery. Using functional magnetic resonance imaging, we examined the neural correlates of time discounting while subjects made a series of choices between monetary reward options that varied by delay to delivery. We demonstrate that two separate systems are involved in such decisions. Parts of the limbic system associated with the midbrain dopamine system, including paralimbic cortex, are preferentially activated by decisions involving immediately available rewards. In contrast, regions of the lateral prefrontal cortex and posterior parietal cortex are engaged uniformly by intertemporal choices irrespective of delay. Furthermore, the relative engagement of the two systems is directly associated with subjects' choices, with greater relative fronto-parietal activity when subjects choose longer term options.
2,581 citations
Posted Content•
TL;DR: In this paper, the authors present a longer version of an essay under preparation for possible publication in the Journal of Economic Literature, which they refer to as their work on reference-dependent utility.
Abstract: UNTVERSITY OF CALIFORNIA AT BERKELEY Department of Economics Berkeley, CaHfornia 94720-3880 Working Paper No. 97-251 Psychology and Economics Matthew Rabin Department of Economics University of California, Berkeley January 1997 Key words: bounded rationality, decision making, fairness, framing effects, heuristics and biases, preferences, psychology, reciprocity, reference-dependent utility JEL Classification: A12, B49, D i l , D60, D81, D83, D91 This is a longer version of an essay under preparation for possible publication in the Journal of Economic Literature. I thank John Pencavel and anonymous referees for earlier comments on its structure and content. For comments on this draft, I thank Steven Blatt, Colin Camerer, Peter Diamond, Erik Eyster, Ernst Fehr, Danny Kahneman, George Loewenstein, Ted O'Donoghue, and John Pencavel. For helpful conversations over the past several years on topics covered in this essay, I thank George Akerlof, Gary Chamess, Eddie Dekel, Peter Diamond, David Laibson, David I. Levine, George Loewenstein, Rob MacCoun, James Montgomery, Vai-Lam Mui, Drazen Prelec, and especially Colin Camerer, Danny Kahneman, and Richard Thaler. Co-authors on research related to the topics of this essay include David Bowman, Deborah Minehart, Ted O'Donoghue, and Joel Schrag. Helpful research assistance was provided by Gadi Barlevy, Nikki Blasberg, Gail Brennan, Paul Ellickson, April Franco, Marcus Heng, Bruce Hsu, Jin Woo Jung, and especially Steven Blatt, Jimmy Chan, Erik Eyster, and Clara Wang. I am extremely grateful for financial support from the Russell Sage and Alfred P. Sloan Foundations.
2,426 citations
TL;DR: This article developed a model of reference-dependent preferences and loss aversion where the gain-loss utility is derived from standard consumption utility and the reference point is determined endogenously by the economic environment.
Abstract: We develop a model of reference-dependent preferences and loss aversion where “gain‐loss utility” is derived from standard “consumption utility” and the reference point is determined endogenously by the economic environment. We assume that a person’s reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain‐loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.
2,079 citations
References
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TL;DR: The authors analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received.
Abstract: Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing âtoo muchâ liquidity.
5,587 citations
"Doing It Now or Later" refers background or methods in this paper
...…give stronger relative weight to the earlier moment as it gets closer.7 In this paper, we adopt an elegant simplification for present-biased preferences developed by Phelps and Pollak (1968), and later employed by Laibson (1994, 1995, 1997), Fischer (1997), and O’Donoghue and Rabin (1999)....
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...For analyses of self-control in people, see Ainslie (1974, 1975, 1987, 1992), Thomas C. Schelling (1978, 1984, 1992 ) , Thaler ( 1980 ) , Thaler and Hersh M. Shefrin (1981), David C. Funder and Jack Block (1989), Stephen J. Hoch and Loewenstein (1991), Ainslie and Haslam ( 1992a ) , Jacob Glazer and Andrew Weiss ( 1992 ) , Shefrin and Thaler (1992), Klaus Wertenbroch (1993), and Laibson (1994, 1995, 1997)....
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...…suggest ) .23 In the realm of 22 There has been a lot of previous research on time inconsistency in savings models; see, for instance, Strotz (1956), Phelps and Pollak (1968), Pollak (1968), Thaler and Shefrin (1981), Shefrin and Thaler (1988, 1992), Laibson (1994, 1995, 1997), and Thaler (1994)....
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...For instance, George A. Akerlof (1991) assumes naive beliefs, while David Laibson (1994, 1995, 1997) and Carolyn Fischer (1997) assume sophisticated beliefs....
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...We thank Steven Blatt, Erik Eyster, and Clara Wang for useful research assistance, and Steven Blatt, Erik Eyster, David Laibson, two anonymous referees, and seminar participants at the University of CaliforniaBerkeley, Northwestern University, the Russell Sage Foundation, Columbia University, Yale University, Harvard University, MIT, the University of Wisconsin, Cornell University, Arizona State University, Santa Clara University, Texas A&M University, and the University of Chicago for helpful comments....
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TL;DR: The economic theory of the consumer is a combination of positive and normative theories as discussed by the authors, which describes how consumers should choose, but it is also described how they do choose, and in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory.
Abstract: The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kanneman and Tversey's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: undeweighting of opportunity costs, failure to ignore sunk costs, scarch behavior choosing not to choose and regret, and precommitment and self-control.
5,099 citations
"Doing It Now or Later" refers background in this paper
...Schelling (1978, 1984, 1992), Thaler (1980), Thaler and Hersh M. Shefrin ( 1981), David C. Funder and Jack Block (1989), Stephen J....
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...For analyses of self-control in people, see Ainslie (1974, 1975, 1987, 1992), Thomas C. Schelling (1978, 1984, 1992 ) , Thaler ( 1980 ) , Thaler and Hersh M. Shefrin (1981), David C. Funder and Jack Block (1989), Stephen J. Hoch and Loewenstein (1991), Ainslie and Haslam ( 1992a ) , Jacob Glazer…...
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TL;DR: A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices as discussed by the authors, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.
Abstract: A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price. Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it—the endowment effect. The example also illustrates what Samuelson and Zeckhauser (1988) call a status quo bias, a preference for the current state that biases the economist against both buying and selling his wine. These anomalies are a manifestation of an asymmetry of value that Kahneman and Tversky (1984) call loss aversion—the disutility of giving up an object is greater that the utility associated with acquiring it. This column documents the evidence supporting endowment effects and status quo biases, and discusses their relation to loss aversion.
4,025 citations
TL;DR: In this article, the authors present a problem which has not heretofore been analysed and provide a theory to explain, under different circumstances, three related phenomena: (1) spendthriftiness; (2) the deliberate regimenting of one's future economic behaviour, even at a cost; and (3) thrift.
Abstract: This paper presents a problem which I believe has not heretofore been analysed2 and provides a theory to explain, under different circumstances, three related phenomena: (1) spendthriftiness; (2) the deliberate regimenting of one’s future economic behaviour— even at a cost; and (3) thrift. The senses in which we deal with these topics can probably not be very well understood, however, until after the paper has been read; but a few sentences at this point may shed some light on what we are up to.
3,427 citations
"Doing It Now or Later" refers background in this paper
...The result follows directly because naifs do it in period t only if Ut( t) ¢ Ut(t) for all t ú t , while sophisticates do it in period t if Ut( t)¢ Ut(t*) for t* å Å Y }.smin {tÉstú t t...
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TL;DR: The authors developed a theory of rational addiction in which rationality means a consistent plan to maximize utility over time, and showed that even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention.
Abstract: We develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time. Strong addiction to a good requires a big effect of past consumption of the good on current consumption. Such powerful complementarities cause some steady states to be unstable. They are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention. Our theory also implies that "cold turkey" is used to end strong addictions, that addicts often go on binges, that addicts respond more to permanent than to temporary changes in prices of addictive goods, and that anxiety and tensions can precipitate an addiction.
3,281 citations
"Doing It Now or Later" refers background in this paper
...Recently, economists have proposed models of ‘‘rational addiction’’ (Becker and Murphy, 1988; Becker et al., 1991, 1994)....
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