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Lecture 50 Some Special Discounting Cases

Choosing not to choose

  • Take an action to prevent ourselves from taking an action… Homer tied himself to the mast of the ship.
  • People pay premium to buy smaller quantities (overfed, drunk, overindulgence, worse off financially).
  • Students set very close deadlines for the fear that they might not get the work done.
  • From ED perspective, this doesn't make sense.
    • As, if you don't want now, you won't want later too
  • Neither by HD
    • Plan not to overindulge, but do it anyway

Self-Control & Time Preferences

  • Thaler, large bowl of cashew nuts with wine \(\to\) Later lack sufficient appetite to enjoy later food
    • So removed the bowl
    • Guests thanked him
  • Econ principle: more options never make you worse off because they can be turned down (the choice to eat the nuts was removed)

Naive vs Sophisticates

  • There are two kinds of hyperbolic discounters
    • Naive
    • Sophisticated
  • Time inconsistent people have self-control problems.
  • Naifs are unaware of self-control problems (assume that future preferences \(\sim\) current preferences)

  • Sophisticates are aware of self-control problems (and accurate predict future behavior)

  • Saving in holiday seasons (utility streams)

    • save-save-high (3-3-27)
    • save-spend-decent (3-9-15)
    • spend-spend-meh (6-6-9)

So a naif cannot predict the fact that come November, his preference will change and so he will assume to go with the save-save-high path. When in reality he will really do save-splurge-decent based on his HD.

  • So this is actually bad for the sophisticate, as he would rule out the 'save-save' option… and be indifferent between 'save-spend' and 'spend-spend'
  • Also bad news for people trying to sell it.

Suppose now that the departmental store offers a layaway plan that will make it impossible to save-spend once layaway is chosen.
- A naif will not choose it since save-save would give a higher utility (he is unaware of his self-control problem)
- A sophisticate realizes that the layaway beats both save-save and save-spend and would select that.

Preferences over profile

Preference for saving the best for last

  • Exercise: cleaning the house and movie
    • With ED or HD, you decided to take the pleasurable experience first… movie \(\gg\) cleaning
    • But xp says, unpleasant (yet essential) experience first and then pleasant. Save the best for the last.
    • Motivation through the unpleasant one…

This can be modelled if \(\delta\gt 1 \implies r \lt 0\), thus a negative time preference. (but an awkward solution)

Preference for Spread

  • Distribute multiple desirable events
  • Halloween candy, savored over time1

Cannot be accounted by either positive or negative time preference.

Preference for Variation over time

  • Avoid choosing the same good over and over again.
  • Value variety
  • Meaning they care about the shape of the utility stream along with individual discounted utilities.

  1. Hey! I remember! I did this in my childhood. Not in the context of Halloween, but my uncle got me a lot of chocolates. ↩