The Economics of Patience: The endogenous determination of time preference

Future Focus: The endogenous determination of time preference
Dr. Russell James III
University of Georgia

Our choices and our satisfaction are driven by the comparisons we make
Nearby additional
Alternative
Future
Past
Expected
Current
Multiple Alternative
Relevant Observed

Behavioral Economics Concepts
Loss Aversion; Endowment Effect; Status Quo Bias
Availability Effects
Endogenous Determination of Time Preference
Nearby additional
Alternative
Future
Past
Expected
Current
Hedonic Adaptation
Placebo Effect; Stereotypes
Multiple Alternative
Anchoring; Paradox of Choice
Peer Effects; Relative Standing
Relevant Observed

The tradeoff between now and later is called time discounting.
We trade money/sensation/experience today for money/sensation/experience later.

How much future value you are willing to give up for current value is your rate of time discounting.

Some people have a high rate of discount for future utility.

Some people have a low rate of discount for future utility.

The tradeoff between now and later applies not just to money…

But, also to other tradeoffs of health and life
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And even to decisions about your weekend…
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Many self-inflicted harmful decisions are the result of exchanging instant gratification for risk of future negative consequences.

These choices can result from deliberative decisions to accept future risk.
Long-term/patient
Planner
Impartial spectator
Deliberative
Cold state
Or from impulsive decisions, when the “elephant” is put in tempting situations
(ex: hyperbolic discounting or projection bias)
Short-term/impulsive
Doer
Passions
Affective/Visceral
Hot state

How can we change?

Alter our time preference
(develop future-orientation or patience)
2. Pre-commitment strategies
(change our elephant’s future environment)

Should we work to develop more future-orientation (patience)?
Victim of my insatiable need for instant gratification.

Behavioral economics
Standard economics
You are already perfectly rational.

Economic Theory
Nobel prize winning economist Gary Becker and Casey Mulligan present a model of time preference for imperfect humans.
People may be too focused on instant gratification, but they can spend effort to develop patience (future-orientation).
G. Becker (Chicago) & C. Mulligan (Chicago), 1997, The endogenous determination of time preference. Quarterly Journal of Economics, 112(3), 729-758

Economic theory: People maximize…
A time discount factor
(because future enjoyment is not the same as current enjoyment)
The enjoyment of future consumption
The enjoyment of current consumption

Becker & Mulligan say we can change it by spending effort (S) to become more future-focused.
In standard economics, our time discount preference (β) is pre-set.

A consumer can “make future pleasures less remote by spending resources (S) on imagining them”
G. Becker (Chicago) & C. Mulligan (Chicago), 1997, The endogenous determination of time preference. Quarterly Journal of Economics, 112(3), 729-758 , p. 734

People can maximize utility “partly by
spending time and other resources to produce
‘imagination capital’
that helps them better appreciate future utilities.”
G. Becker (Chicago), 1996, Accounting for Tastes. Cambridge, Massachusetts: Harvard University Press, p. 11

A Nobel prize winning economist using an economic model incorporating
Imagination

“How can a person improve his capacity to appreciate the future? What exactly is S? First, Sis partially determined by time and effort spent appreciating future pleasures.”

“While forming a mental picture of one’s future pleasures may not be incredibly difficult, the process of anticipation is not merely one of image formation but also one of scenario simulation.”

“Even image formation may not be cheap because images of future pleasures have to be repeatedly refreshed in one’s mind in order to compete with current pleasures.”

http://www.youtube.com/watch?v=wPFA8n7goio 1:13-4:30

Only emotional goals work
The rider may be compelled by logic or emotion
The elephant is purely emotional (visceral)
To engage the elephant, the imagery of future goals must evoke emotion.

Suppose you are advising a friend whose goal is to become an Olympic athlete. What emotional images or scenes can you imagine that might be motivating?

Suppose you are advising a friend whose goal is to become a physician. What emotional images or scenes can you imagine that might prove motivating?

Avoid unfocused, unemotional goals…

Can education make you more future-oriented?
Becker and Mulligan suggest, “through repeated practice at problem-solving, schooling helps children learn the art of scenario simulation. Thus,
educated people
should be more
productive at
reducing the
remoteness of
future pleasures.”

Focusing on long-term goals using imagery and emotion can change your future-orientation.
But, how do we go about selecting the best goals? More later…

Slides by:
Russell James III, J.D., Ph.D.
Asst. Professor, Department of Housing &
Consumer Economics, University of Georgia
Please use these slides!
If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks!
The outline for this behavioral economics
series is at rjames.myweb.uga.edu/outline.htm