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Lecture 47 Anomalies of DUM & Time Inconsistent Behavior

6. Violation of Independence & Preference for Spread

For independence
- Elaborated options about dinner (home \(\to\) French / French \(\to\) home) changes the preferences
- Framing effect

For spread
- Without limits: less spread (3 & 13 weeks)
- With 2 year limit: more spread (8 & 31 weeks) anchoring effect (the limit of 2 years was the anchor, on the basis of which the spacing was decided)
- Evidence for 'income smoothing': 10 vs 12 monthly payments… (choose 10 and earn interest, but they preferred 12)

Time Inconsistent Behavior in Economics

  • Smith on Self Control
  • We are myopic for our passions (shortsighted)
    • Pleasure in 10 years doesn't interest us
  • Discounting of future consumption is a mistake
    • Failure of willpower
  • Arthur Pigou
    • Failure of imagination

Because of Paul Samuelson's DUM we thought of humans as Econs.

Quasi-Hyperbolic Discounting

  • Quasi-hypoerbolic discounting or present-bias (100 now, 70 next, 63 later and beyond) (30%,10%,0%)
  • Exponential discounting ensures time-consistent preferences (even as time passes by, the ordering doesn't change)
    • Waiting for 1 year is not worth the final match. I will just go for quarter final this year.

Naive Procrastination

  • File income tax returns
    • Refunds are received by most
    • Last minute \(\to\) risk of missing deadline, errors or missing info \(\to\) rejection
    • Case overloads in the last minute.
  • Procrastination is engrained into human behavior. Only when burnt by the consequences, we decide to fall in line and stop procestination