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An introduction to the economic concept of the dual self-consumer

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- 1. Introduction to the dual-self model of choice<br />Dr. Russell James III<br />Texas Tech University<br />
- 2. An alternative model<br />Previous discussion shows that the rational, utility-maximizing assumption for consumers is not always true.<br />So, now what?<br />Throw it out the door?<br />But, it often makes accurate predictions<br />A modification from behavioral economics<br />
- 3. “Our theory proposes that many sorts of decision problems should be viewed as a game between a sequence of short-run impulsive selves and a long-run patient self.”<br />Drew Fudenburg (Harvard U.) and David K. Levine (Washington U.), 2006, A dual-self model of impulse control. American Economic Review, 96(5), 1449-1476.<br />
- 4. Fudenberg & Levine (2006)<br />Long-run (patient) self<br /><ul><li>This side tries to maximize utility across time</li></ul>Short-run (impulsive) selves<br /><ul><li>Sequential selves that exist only for a brief time
- 5. Each cares only about immediate experience</li></li></ul><li>Experiment Time!<br />This is real. One of you will be picked to receive one of the choices you selected.<br />
- 6. Choice One<br />Pick one<br />You can receive $1.00 (cash) on the second to last day of this class.<br />You can receive $1.05 (cash) on the last day of this class.<br />
- 7. Choice Two<br />Pick one. One week prior to the last day of class, you can have during class either<br />Tangerine<br />Chocolate Bar<br />The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)<br />
- 8. It’s now time!<br />Get ready, someone is about to get a nice giveaway!<br />
- 9. Choice Three<br />Pick one. Right now, you can have either<br />Tangerine<br />Chocolate Bar<br />The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)<br />
- 10. Choice Four<br />Pick one<br />You can receive $1.00 (cash) right now.<br />You can receive $1.05 (cash) during the next meeting of this class.<br />
- 11. Research Results<br />Read & van Leeuwen (1998). 200 participants. People who were not hungry, chose the unhealthy snack for delivery in one week<br /> 26% of the time<br />They chose the unhealthy snack for immediate consumption<br /> 70% of the time<br />←Next Week<br />Right Now -> <br />26%<br />70%<br />
- 12. Dual-self<br />Long-run (patient) self<br /><ul><li>This side tries to maximize utility across time</li></ul>Short-run (impulsive) selves<br /><ul><li>Sequential selves that exist only for a brief time
- 13. Each cares only about immediate experience</li></li></ul><li>Discussion<br />Short-run (impulsive) selves<br />Does the short-run self care about<br /><ul><li>Future consumption next week?
- 14. Future health consequences?
- 15. Immediate consumption choice?</li></ul>←Next Week<br />Right Now -> <br />26%<br />70%<br />
- 16. Discussion<br />Discuss with a neighbor and vote in a moment.<br />Does this result fit better with simple rational decision-making or a two-system approach? <br />Simple rational decision making<br />Two system “dual-self” decision making <br /> (long-run/patient self and short-run/impulsive selves)<br />←Next Week<br />Right Now -> <br />26%<br />70%<br />
- 17. Class vote comparison<br />How many voted for chocolate at the end of the semester?<br />Fall 2009 – 62.7% (n=86)<br />How many voted for chocolate right now?<br />Fall 2009 – 64.8% (n=74)<br />
- 18. Hyperbolic discounting<br />Would you rather receive $100 right now or $101 in a week? Most people choose $100 right now. <br />But when the choice is between $100 a year from now and $101 in a year and a week from now, most people choose $101 in a year and a week. <br />This is time inconsistent, as both choices involve delaying by one week for $1.<br />Note also that choosing $100 right now implies an interest rate charge of 1% per week or APR of 52%<br />
- 19. Discussion<br />Short-run (impulsive) selves<br />Does the short-run self care about<br /><ul><li>Immediate money?
- 20. Two different future money options? </li></ul>Now <br />v. later<br />Later v. <br />much later<br />
- 21. Class vote comparison<br />How many voted to take the $1 on the second to last day of the class (instead of $1.05 on the last day)?<br />Fall ‘09: 32.2% (n=87)<br />How many voted to take the $1 right now (instead of $1.05 in the next class meeting)?<br />Fall ‘09: 66.3% (n=86)<br />What is the implied interest rate being charged to those who chose the immediate $1?<br />Next class in 2 days. 5% difference. APR = (365/2) X 5% ≈912%<br />
- 22. Thoughts to ponder<br />Could the willingness of some to ignore a 920% interest rate for immediate reward have implications for consumer use of credit?<br />Could the variations in the healthiness of food choices have implications for consumer food choices?<br />More later…<br />
- 23. Slides by: <br />Russell James III, J.D., Ph.D., CFP®<br />Associate Professor <br />Division of Personal Financial Planning <br />Texas Tech University<br />russell.james@ttu.edu<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 series is at <br />http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component <br />

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