Experimental & Behavioral Economics

Lecture 4: Self control, Procrastination and

Willpower

Dorothea Kübler Summer term 2018

1

1 - Self control

• Example: before lunch you decided to not have a dessert, but when you arrive at the cafeteria you see the choices and order a cake. But then you regret it afterwards.

-> inconsistent with preferences before and after lunch -> discount rate between two periods depends on time of

evaluation (should be the same for any t and t+1) • Desired consumption before lunch

• Actual consumption

• If β<1: self-control problem

( ) ( ) 022

1 ≥+ xuxu βδβδ

( ) ( ) 021 ≥+ xuxu βδ

Quasi-hyperbolic time preferences

• Discount function for time s evaluated at time t

• Different types expect to have the following future discount rate (in t+1)

,...,,,1

is at time utilities future of flow a of luePresent va1 with 21for equals and for 1 equals

32

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1ˆ with ,...ˆ,ˆ,ˆ,1 :agent tedsophistica

control)-self futureabout -ˆ(

1ˆ with ,...ˆ,ˆ,ˆ,1:agent naivepartially

1 with ,...,,,1 :agent naive

1ˆ with ,...,,,1 :agent lexponentia

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→

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enceoverconfid

Going to the Gym (DellaVigna & Malmendier, QJE 2004)

• Consumer decides about going to the gym • (C)onsumption gives a payoff c<0 in t=1 and b>0 in t=2 • No consumption (NC) results in payoff 0 in t=1 and t=2

• A partially naïve consumer makes the following forecast as of t=0

-> he is aware of his quasi-hyperbolic preferences, but underestimates his

self-control problem (overestimates β, thus he is overconfident)

cbbct

cbbc

t

≥⇔≥+−=

≥⇔≥+−

=

βδβδ

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0 if C choosesconsumer nt inconsiste- timea 1At

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if consume toishesconsumer w the0At 2

cbbc ≥⇔≥+− δβδβ ˆ 0ˆ

Going to the Gym (DellaVigna & Malmendier, QJE 2004)

• Difference between desired and actual consumption of

• Difference between forecasted and actual consumption of

↑−↓−−− problem controlself ,)()(:consumernt inconsiste-time

ββδδ cbcb

ence)overconfid (no spreference timefutureabout nsexpectatio rational 0)()(1ˆ

:consumer tedsophistica0)()(1ˆ

:consumer consistent-timeenceoverconfid sconsumer'for measure ˆ0)()ˆ(

:consumer naivepartially

→=−−−→<=

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cbcb

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βδβδββ

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Cash versus Credit Card

• People buy more unhealthy products and spend more money if paying with credit or debit card. – Grocery shopping (Manoj et al. 2011):

analysis of shopping behavior of single households in US over 6 month (no randomization). -> Significantly more unhealthy products if paid with credit or debit

– WTP (Prelec and Simester, 2001): Experiment (at MIT): auctioning off NBA/MLB tickets and subjects have to pay either with cash or credit card (randomized)

-> avg. WTP for NBA ticket Cash: $29 (N=31) -> avg. WTP for NBA ticket Credit card: $61 (N=33)

Credit card borrowing (Meier and Sprenger, AEJ Applied 2010)

• Is there a relation between credit card spending and present-biased preferences? – People with higher credit card balances may have a desire

for immediate consumption (at a reduction of future consumption)

• Combine experimental measures for time preferences with administrative data (credit balances, credit scores, etc) – Field experiment in poor neighborhood in Boston – ~600 participants at Voluntary Income Tax Assistance site – Consent to access credit reports (from credit bureau)

Credit card borrowing

• How to measure time preferences? • Time frame 1 (amount X today vs amount Y in 1 month)

• Time frame 2 (amount X in 6 months / amount Y in 7 months)

• Incentivized: 10 percent of subjects were paid for their choice

Credit card borrowing

• The switching row from early payment to the later payment gives an indication of subjects (im)patience “How much compensation does a subject require in order to choose the later payment?”

• Can also compute individual’s discount factor: X~δdY <-> δ~(X/Y)1/d

• The delay length (d) in Time frame 1 is same as in Time frame 2

-> time-consistent subjects should switch in the same row in both time frames (since the delay length is the same)

-> present-biased subjects switch later in time frame 1 (need higher compensation to switch to later payment) than in time frame 2

Present bias is associated with a 16 percentage point increase in the probability of borrowing (-> conditional on borrowing, this results in about $540 more debt) Only a correlation! -> it could be that present bias causes higher credit card debt, but it could also be that the credit card balance affects measurement of time preferences (e.g., liquidity constraints)

Experiment and credit data in same year (2006)

Experiment 2006 and credit data 2007

2 - Procrastination

• Put off a task until tomorrow and believe you will act tomorrow, but overlook that tomorrow the problem is the same and put it off again …

-> naïve beliefs • Difference to self-control

– Procrastination: delay is systematically larger than initial expectations

– Delay: task is not undertaken immediately -> (β,δ) sophisticates do not delay for long

-> (β,δ) naiveté (overconfidence) delay for long

Procrastination (Ariely and Wertenbroch – PS 2002)

• Experiment 1 (executive education at Sloan MIT) – 99 managers

(48 in control, 51 in treatment; two sections of the class) – high incentives: no reimbursement of fees if fail class – submission of 3 papers, 1% grade penalty for late submission – Submission dates final, could not be changed – No advantage of early submission, feedback only at the end of the

course • Two “treatment” groups

– Control: evenly spaced deadlines – Treatment: set your own deadline -> if there are not self-control problems deadline would be set for last

day of class

Experiment 1 -- Results

• 68 percent set deadlines prior to last week • Only 27 percent submitted on last day of class -> shows demand for commitment (risky)

Experiment 1 -- Results

• Results on completion and grades: – No late submissions – Papers: Grades in Control (evenly spaced deadlines) higher

than grades in Treatment (self chosen deadlines) • Consistent with self-control problems

– If students have self-control problems and set deadlines optimally, greater flexibility should yield higher grades

– But not if deadlines are set suboptimally • Concerns?

– Two sessions not randomly assigned – Sample size: n = 2 (correlated shocks in two sections) – Other problems?

Experiment 2

Aim: show that self-imposed deadlines are better than end deadlines, even when set suboptimally (as Experiment 1 has shown)

-> Do self-imposed deadlines improve performance? -> Are deadlines set optimally? • Controlled experiments -- proofreading of 3 texts over 21

days – 10 cents for each error detected, $1 penalty for each day of delay

Experiment 2

• 60 Participants in 3 treatments – Group A: evenly-spaced deadlines (one text every 7 days) – Group B: end deadlines (all 3 texts on day 21) – Group C: self-imposed deadlines (choose their own deadlines for each

text)

• Predictions: – Standard Theory: B = C > A – Sophisticated Present-Biased (demand for commitment): C > A > B – Fully Naive Present-Biased: A > B = C – Partially Naive Present-Biased: A > C > B

Experiment 2 -- Results

• Preference for self-imposing costly deadlines • Results on Performance: A > C > B

Experiment 2 -- Results

• Without self-control problems, we would not observe self-imposed deadlines – But significant demand

• Result 1. Support for present bias with partially naïve individuals – Deadline setting helps performance

• Result 2. Deadline setting is sub-optimal – Otherwise C > A – Additional evidence: subject who evenly space out

deadlines in C have same performance as subjects in A

3 - Willpower • What is willpower?

– The ability to resist short-term temptations in order to meet long-term goals

– Thought to control thoughts, emotions, impulses, and performance – A limited cognitive resource which may have an impact on exercising

self-control. • Individuals have a finite amount of willpower which is used

for all kinds of tasks. Idea: Willpower depletes when using it, but is replenished after a while (like a muscle).

– Exercising self-control now impacts self-restraint later e.g., individuals can maintain their diet discipline for some time, but

not over long time – Relation to time inconsistency: choose X today (instead of Y>X tomorrow) but choose Y in 11 days

(instead of X<Y in 10 days) if “cost of willpower” to resist X > than utility gain of Y (no willpower necessary in 10 vs. 11 days)

Willpower (Baumeister et al 1998)

• Study on “taste perception”: subjects (one at a time) were left alone in a room with fresh-baked cookies and a bowl of radishes. – Radish condition: eat 1-3 radishes (5 min) – Cookie condition: eat 1-3 cookies (5min) – No food control condition Always both food available, but only allowed to taste assigned food

• Problem-solving task: geometric puzzle (presented as unrelated to food task) – Task was unsolvable -> measure time spend on solving the task

• Result – Everyone ate only his assigned food! Although some were tempted – Time spent on task (average min): Radish (~8), Cookie (~19), Control (~21)

Poverty and willpower • Poor people often make decisions, which appear myopic, e.g.,

they save too little • There is an “old” view that poor people have an innate

inclination toward myopic behavior which keeps them poor. • Example: a scoop of ice cream for 1 Euro is far more costly for

someone living on 5 Euro a day than for someone living on 50 Euro a day.

-> the same self-control problem is more consequential for the poor.

• If resolving such trade-offs requires willpower then – it affects other domains as well (since willpower depletes) and – it affects poor people more (they face more trade-offs)

• Could it be that poverty makes economic decisions more difficult by consuming more cognitive resources?

Economic decisions deplete willpower (Spears, BEJEAP 2011)

• Experiment in India with 57 day laborers (all males) • Store game (cooking oil, tiffin, bundle of rope)

-> depletion task – Poor (choose or assigned 1 item) – Rich (choose or assigned 2 items) – Randomized (2x2 design) {poor choice, poor no choice, rich choice, rich no choice}

• Handgrip and Stroop task -> behavioral task – Squeeze handgrip as long as they could – Cards with numbers: how many times is number shown

on card 5 5

Economic decisions deplete willpower (Spears, BEJEAP 2011)

• Does economic decision under scarcity affect behavioral task? -> poor*choice is negative and significantly different from zero

Economic decisions deplete willpower (Spears, BEJEAP 2011)

• Making an economic decision under scarcity causes worse performance in willpower task

• But what about underlying mechanisms, i.e., is it because of depleted willpower?

• Choice of good may provide answer -> willpower is limited and consumed e.g., by resisting temptation

– Cooking oil ~ temptation good – Tiffin ~ investment good

-> restrict sample to subjects who chose or were assigned oil and see whether their willpower is not depleted

-> no evidence for this (but: maybe those who chose the oil first tried to resist the choice?)