The Economics Of Impatience
Subtitle: “In experiments, animals often prefer smaller, immediate rewards over larger rewards that are deferred — thus failing to maximize their total gain. Many people exhibit similar behaviour.”
Introduction (Via Ideas.Repec.org)
The irresistible cravings of addicts provide an extreme example of short-term behaviour with adverse long-term consequences. The field of study known as experimental and behavioural economics indicates, however, that some of the principles that underpin addictive behaviour are quite common and can help us to understand human behaviour more generally. At a meeting* held late last year, participants discussed how the tools and concepts of this field can be used to understand, predict and influence people’s decisions in circumstances in which some of the rewards or costs of a choice accrue in the future. In trade jargon, these are known as ‘intertemporal choices’, and at some time or other we all have to make them. Examples are decisions about savings and the amount of credit-card debt we run up, and about eating habits and even marriage — all of these choices have positive or negative consequences that lie in the future. If animals have to choose repeatedly between a smaller reward arriving soon (SRS) and a larger reward arriving later (LRL), the SRS is often preferred even though the repeated choice of the LRL would maximize the overall gain1–3.
Interesting Finding (Via Ideas.Repec.Org)
But to what extent do people exhibit similar behaviour to that of hungry pigeons? At the conference, evidence was presented that, for many people, the discount rate for short-term events is likewise much higher than for events that have outcomes further in the future (G. Loewenstein, Carnegie Mellon Univ.). For example, when a small reward is due tomorrow, and a larger reward is due one year hence, many people prefer the small reward. But when the small reward is due in one year and one day, and the larger reward in two years, they tend to prefer the larger reward. For events that are far enough in the future, people are prepared to be patient, and so behave inconsistently depending on the time frame. This conclusion constitutes a challenge for economists who, for decades, have assumed that individuals discount future rewards at a constant rate.