Hyperbolic Discounting & Projection Bias

7,227 views
7,042 views

Published on

A review of two behavioral economics concepts that cause systematic misprojection of future behavior in consumer decisions

Published in: Business, Technology
0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
7,227
On SlideShare
0
From Embeds
0
Number of Embeds
2,625
Actions
Shares
0
Downloads
272
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide
  • Purchased from istockphoto from pinopic “salesman persuasion”
  • http://www.flickr.com/photos/annagaycoan/3724264262/
  • http://www.flickr.com/photos/smorchon/2279443485/
  • Note the gap between the red and blue lines is an example of projection bias
  • Note the gap between the red and blue lines is an example of projection bias
  • This is why my 9 year old daughter will be allowed to date when she is 30.
  • Cited in Epley & Dunning: God, I thank thee that I am not like other men, extortioners, unjust, adulterers, or even like this tax collector.Luke 18:11, Revised Standard Version
  • Hyperbolic Discounting & Projection Bias

    1. 1. Hyperbolic Discounting andProjection Bias<br />How we misread the future<br />Dr. Russell James III<br />University of Georgia<br />
    2. 2. We can influence the elephant’s behavior by choosing our future environment…<br />So why won’t we do it?<br />
    3. 3. Answer: We systematically over-project the rider’s future control of immediate decisions.<br />I’m always in charge.<br />Sure you are. Except when I decide otherwise.<br />
    4. 4. Lessons<br />Cold v. Hot<br />Humans systematically <br />mis-project behavior.<br />Projection bias: When in a cold state, we underrate the likelihood of hot state actions. <br />Hyperbolic discounting: We underrate the intensity of future desires<br />Later v. Now<br />
    5. 5. Does the future me want different things?<br />Choose among 24 movie videos <br />Some are “low brow”<br />Some are “high brow”<br />Does my choice depend on whether I am picking for tonight, next Thursday, or the following Thursday?<br />Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.<br />
    6. 6. Does the future me want different things?<br />Did people choose…<br />More “low brow” movies now, more “high brow” movies for later<br />More “high brow” movies now, more “low brow” movies for later<br />About the same regardless of whether picking for now or later<br />Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.<br />
    7. 7. Next week I will want things that are good for me…<br />Choosing for tonight<br />Choosing for next Thursday<br />Choosing for second Thursday<br />Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.<br />
    8. 8. Does the future me want different things?<br />When choosing between a healthy and unhealthy snack for delivery in one week, do people systematically misproject future desires?<br />←Next Week-><br />Predicted preference<br />←Right Now-><br />Actual preference<br />D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.<br />
    9. 9. Does the future me want different things?<br />Are people <br />More likely to choose the unhealthy snack for next week<br />More likely to choose the unhealthy snack for right now<br />About as likely either way<br />←Next Week-><br />Predicted preference<br />←Right Now-><br />Actual preference<br />D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.<br />
    10. 10. Does the future me want different things?<br />26% chose the unhealthy snack for delivery in one week right after lunch.<br />74%<br />←Next Week-><br />Predicted preference<br />26%<br />D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.<br />
    11. 11. Does the future me want different things?<br />One week later, when allowed to change their choice at the delivery, 70% chose the unhealthy snack for immediate consumption<br />74%<br />←Next Week-><br />Predicted preference<br />←Right Now-><br />Actual preference<br />26%<br />30%<br />70%<br />D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.<br />
    12. 12. Hyperbolic discounting<br />This is an example of under-rating the intensity of future desires [hyperbolic discounting].<br />Preferences vary with time.<br />Future preferences are consistently misprojected.<br />Later v. Now<br />
    13. 13. In the future, I expect to prefer the long-term, rational choice.<br />When the future becomes “right now,” I prefer the pleasurable choice!<br />Later v. Now<br />[hyperbolic discounting] <br />
    14. 14. Projection Bias: How our current state (hot v. cold) influences projections of our future desires.<br />Cold v. Hot<br />
    15. 15. Does the current state of hunger change which snack people will order for delivery next week?<br />Yes, hungry people choose the unhealthy snack<br />Yes, hungry people choose the healthy snack<br />No<br />
    16. 16. Projection of future preferences depends on our current state<br />I’m not hungry right now, so next week I will prefer the healthy snack.<br />People asked right after lunch (not hungry), chose the unhealthy snack for delivery in one week right after lunch<br /> 26% of the time.<br />People asked four hours after lunch (hungry), chose the unhealthy snack for delivery in one week right after lunch<br />42% of the time<br />I’m hungry, so next week I will prefer the candy bar.<br />Cold v. Hot<br />
    17. 17. Projection bias<br />Cold v. Hot<br />Cold state projects to future cold state<br />I’m not hungry right now, so next week I will prefer the healthy snack just like I do right now.<br />Hot state projects to future hot state<br />I’m hungry, so next week I will prefer the unhealthy choice just like I do right now.<br />
    18. 18. Actual future impulsive desires when in a “hot” state in the future<br />Hyperbolic Discounting<br />Projected future impulsive desires when currently in a hot state<br />Actual future impulsive desires when in a “cold” state in the future<br />Projection Bias<br />Hyperbolic Discounting<br />Projected future impulsive desires when currently in a cold state<br />
    19. 19. Actual future impulsive desires when in a “hot” state in the future<br />Later v. Now<br />Projected future impulsive desires when currently in a hot state<br />Actual future impulsive desires when in a “cold” state in the future<br />Cold v. Hot<br />Later v. Now<br />Projected future impulsive desires when currently in a cold state<br />
    20. 20. Hyperbolic discounting may exceed projection bias<br />Actual future impulsive desires when in a “hot” state in the future<br />Hyperbolic Discounting<br />Actual future impulsive desires when in a “cold” state in the future<br />Projected future impulsive desires when currently in a hot state<br />Hyperbolic Discounting<br />Projection Bias<br />Projected future impulsive desires when currently in a cold state<br />
    21. 21. Hyperbolic discounting and projection bias in snack choice<br />88-92% choose immediately available unhealthy snack when hungry<br />Hyperbolic Discounting<br />70% choose immediately available unhealthy snack when not hungry <br />42% pre-order unhealthy snack when hungry<br />Hyperbolic Discounting<br />Projection Bias<br />26% pre-order unhealthy snack when not hungry<br />
    22. 22. Hyperbolic discounting and projection bias in snack choice<br />88-92% choose immediately available unhealthy snack when hungry<br />Later v. Now<br />70% choose immediately available unhealthy snack when not hungry <br />42% pre-order unhealthy snack when hungry<br />Later v. Now<br />Cold v. Hot<br />26% pre-order unhealthy snack when not hungry<br />
    23. 23. An experiment with heroin addicts<br />Heroin addicts in treatment receive a replacement drug.<br />It produces a mild high designed to ward off heroin cravings. <br />A double-dose produces a longer, more intense high.<br />Choice between money or a double-dose, either to be received in five days.<br />G. Badger (U. Vermont), W. Bickel (U. Arkansas), L . Giordano (Duke), E. Jacobs (S. Illinois U.), G. Loewenstein (Carnegie Mellon), L. Marsch (St. Luke’s Hospital, NY), 2007, Altered states: The impact of immediate craving on the valuation of current and future opiods. The Journal of Health Economics, 26, 865-876.<br />
    24. 24. Projection bias predicts that heroin addicts…<br />Would forego more money for the promise of an extra dose in 5 days if they were currently craving.<br />Would forego less money for the promise of an extra dose in 5 days if they were currently craving.<br />Would forego more money for an immediate extra dose than for one in 5 days. <br />The state of craving would make no impact because they don’t get the extra dose for 5 more days.<br />
    25. 25. When in a HOT state, I act as if I will always be in a HOT state.<br />When in a COLD state, I act as if I will always be in a COLD state.<br />
    26. 26. I need a hit now, so next week I will prefer an extra dose to $50.<br />I’m not jonesing now, so next week I will prefer <br />$50 to an extra dose.<br />
    27. 27. In the future, I expect to prefer the long-term, rational choice.<br />When the future becomes “right now,” I make the impulsive choice.<br />Hyperbolic discounting with opiates?<br />
    28. 28. Hyperbolic discounting and projection bias with opiod<br />When not craving (after first dose) addicts were willing to forego $35 in 5 days for the promise of an extra dose in 5 days. <br />After 5 days, when not craving (after first dose) addicts were willing to forego an immediate $50 for an immediate extra dose.<br />When craving (before first dose) addicts were willing to forego $60 in 5 days for the promise of an extra dose in 5 days. <br />After 5 days, when craving (before first dose) addicts were willing to forego an immediate $75 for an immediate extra dose.<br />Projection bias<br />Hyperbolic Discounting<br />Hyperbolic Discounting<br />
    29. 29. Hyperbolic discounting and projection bias with opiod<br />When not craving (after first dose) addicts were willing to forego $35 in 5 days for the promise of an extra dose in 5 days. <br />After 5 days, when not craving (after first dose) addicts were willing to forego an immediate $50 for an immediate extra dose.<br />When craving (before first dose) addicts were willing to forego $60 in 5 days for the promise of an extra dose in 5 days. <br />After 5 days, when craving (before first dose) addicts were willing to forego an immediate $75 for an immediate extra dose.<br />Cold v. Hot<br />Projection bias<br />Hyperbolic Discounting<br />Hyperbolic Discounting<br />Later v. Now<br />Later v. Now<br />
    30. 30. After 5 days, willing to forego $75 immediately for an double-hit immediately<br />Hyperbolic Discounting<br />Willing to forego $60 in 5 days for a double-hit in 5 days<br />After 5 days, willing to forego $50 immediately for a double-hit immediately<br />Projection Bias<br />Hyperbolic Discounting<br />Willing to forego $35 in 5 days for a double-hit in 5 days<br />
    31. 31. After 5 days, willing to forego $75 immediately for an double-hit immediately<br />Later v. Now<br />Willing to forego $60 in 5 days for a double-hit in 5 days<br />After 5 days, willing to forego $50 immediately for a double-hit immediately<br />Cold v. Hot<br />Later v. Now<br />Willing to forego $35 in 5 days for a double-hit in 5 days<br />
    32. 32. In the future, I expect to prefer the long-term, rational choice and quit smoking.<br />When the future becomes “right now,” I keep smoking.<br />Hyperbolic discounting with smoking?<br />
    33. 33. Self-predicted future behavior in teenage smoking<br />15% of light smokers (less than one cigarette per day) in high school predicted they “might” be smoking in 5 years.<br />15% predicted<br />5 years later, what percentage were still smoking?<br />Less than 5%<br />5% to 15%<br />About 15%<br />15% to 30%<br />Greater than 30%<br />L. Johnston (U. Michigan), P. O’Malley (U. Michigan), J. Bachman (U. Michigan), 1993, Illicit drug use, smoking, and drinking by America’s high school students, college students, and young adults, 1975-1987. National Institute on Drug Abuse: Rockville, Maryland.<br />
    34. 34. Self-predicted future behavior in teenage smoking<br />15% of light smokers (less than one cigarette per day) in high school predicted they “might” be smoking in 5 years.<br />15% predicted<br />43% actual<br />5 years later, 43% were still smoking.<br />L. Johnston (U. Michigan), P. O’Malley (U. Michigan), J. Bachman (U. Michigan), 1993, Illicit drug use, smoking, and drinking by America’s high school students, college students, and young adults, 1975-1987. National Institute on Drug Abuse: Rockville, Maryland.<br />
    35. 35. Projection bias in sexual hot states and cold states<br />Question: Can we predict how we will behave when sexually aroused?<br />Study: Male heterosexual college students at UC-Berkeley were asked a series of questions related to sex and relationships. The same men answered in both a non-aroused state and an aroused state on different days, using a 0 to 100 sliding scale. <br />http://www.youtube.com/watch?v=mFMDgW0wDeI (arousal.wmv)<br />Question text here…<br /> Possibly<br />NO Yes<br />Ariely, D. (MIT) & Lowenstein, G. (Carnegie Mellon), 2006, The heat of the moment: The effect of sexual arousal on sexual decision making. Journal of Behavioral Decision Making, 19, 87-98.<br />
    36. 36. Projection bias in sexual hot states and cold states<br />Would you encourage your date to drink to increase the chance that she would have sex with you?<br />
    37. 37. Projection bias in sexual hot states and cold states<br />Would you encourage your date to drink to increase the chance that she would have sex with you?<br />Average non-aroused response: 46<br /> Possibly<br />NO YES<br />
    38. 38. Projection bias in sexual hot states and cold states<br />Would you encourage your date to drink to increase the chance that she would have sex with you?<br />Average non-aroused response: 46<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 63<br />
    39. 39. Projection bias in sexual hot states and cold states<br />Would you encourage your date to drink to increase the chance that she would have sex with you?<br />Average non-aroused response: 46<br /> Possibly<br />NO YES<br />Projection bias<br />NO YES<br />Average aroused state response: 63<br />
    40. 40. Projection bias in sexual hot states and cold states<br />Would you tell a woman that you loved her to increase the chance that she would have sex with you?<br />
    41. 41. Projection bias in sexual hot states and cold states<br />Would you tell a woman that you loved her to increase the chance that she would have sex with you?<br />Average non-aroused response: 30<br /> Possibly<br />NO YES<br />
    42. 42. Projection bias in sexual hot states and cold states<br />Would you tell a woman that you loved her to increase the chance that she would have sex with you?<br />Average non-aroused response: 30<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 51<br />
    43. 43. Projection bias in sexual hot states and cold states<br />Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?<br />Does this question have implications for public health? <br />Unwanted pregnancy? <br />STDs?<br />HIV/AIDS?<br />
    44. 44. Projection bias in sexual hot states and cold states<br />Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?<br />Average non-aroused response: 86<br /> Possibly<br />NO YES<br />
    45. 45. Projection bias in sexual hot states and cold states<br />Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?<br />Average non-aroused response: 86<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 60<br />
    46. 46. Projection bias in sexual hot states and cold states<br />Remember: These differences only show “projection bias.” They do not incorporate in the additional effects of “hyperbolic discounting”. If the real option was actually immediately present, we would expect a much larger gap.<br />Average non-aroused response: 86<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 60<br />
    47. 47. Projection bias in sexual hot states and cold states<br />A condom interferes with sexual spontaneity.<br />
    48. 48. Projection bias in sexual hot states and cold states<br />A condom interferes with sexual spontaneity.<br />Average non-aroused response: 58<br /> Possibly<br />NO YES<br />
    49. 49. Projection bias in sexual hot states and cold states<br />A condom interferes with sexual spontaneity.<br />Average non-aroused response: 58<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 73<br />
    50. 50. Projection bias in sexual hot states and cold states<br />Would you keep trying to have sex after your date says “no.”<br />
    51. 51. Projection bias in sexual hot states and cold states<br />Would you keep trying to have sex after your date says “no.”<br />Average non-aroused response: 20<br /> Possibly<br />NO YES<br />
    52. 52. Projection bias in sexual hot states and cold states<br />Would you keep trying to have sex after your date says “no.”<br />Average non-aroused response: 20<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 45<br />
    53. 53. Projection bias in sexual hot states and cold states<br />Would you slip a woman a drug to increase the chance that she would have sex with you?<br />
    54. 54. Projection bias in sexual hot states and cold states<br />Would you slip a woman a drug to increase the chance that she would have sex with you?<br />Average non-aroused response: 5<br /> Possibly<br />NO YES<br />
    55. 55. Projection bias in sexual hot states and cold states<br />Would you slip a woman a drug to increase the chance that she would have sex with you?<br />Average non-aroused response: 5<br /> Possibly<br />NO YES<br />NO YES<br />Average aroused state response: 26<br />
    56. 56. So, why don’t we do it?<br />I’m always in charge.<br />Q: If we could control the elephant’s behavior by choosing our future environment, why don’t we do it?<br />A: We systematically over-project the rider’s future control of immediate decisions.<br />Sure you are. Except when I decide otherwise.<br />
    57. 57. Persistently false predictions<br />Fundamental cognitive conflict:<br />Why would you never see this kind of a press conference?<br />http://www.theonion.com/content/video/congressman_offers_preemptive (first 45-60 seconds)<br />We engage in the behavior, but we don’t predict that we will engage in the behavior.<br />
    58. 58. Lessons<br />Cold v. Hot<br />Humans systematically mis-project behavior.<br />Projection bias: When in a cold state, we underrate the likelihood of hot state actions. <br />Hyperbolic discounting: We underrate the intensity of future immediate desires<br />Later v. Now<br />
    59. 59. Result: Predictably irrational behavioral misprojections<br />“people are generally more accurate in their predictions of what others will do than in their (morally rosier) predictions about what they themselves will do”<br />Haidt, J. (U. Virginia), 2007, The new synthesis in moral psychology. Science, 316, 990.<br />“Researchers have repeatedly demonstrated that people on average tend to think they are more charitable, cooperative, considerate, fair, kind, loyal, and sincere than the typical person but less belligerent, deceitful, gullible, lazy, impolite, mean, and unethical---just to name a few.”<br />Epley, N. (Cornell) & Dunning, D. (Cornell), 2000, Feeling ‘holier than thou’: Are self-serving assessments produced by errors in self- or social prediction? Journal of Personality and Social Psychology, 79(6), 861-875<br />
    60. 60. So, why don’t we do it?<br />I’m always in control.<br />You could choose your environment to protect against damage by the elephant.<br />You could choose your environment to encourage the achievement of your goals.<br />But, you won’t, because you think you won’t need it.<br />
    61. 61. Slides by: <br />Russell James III, J.D., Ph.D.<br />Asst. Professor, Department of Housing & <br />Consumer Economics, University of Georgia<br />Please use these slides! <br />If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks!<br />The outline for this behavioral economics<br />series is at rjames.myweb.uga.edu/outline.htm<br />

    ×