TIME PREFERENCE
http://www.youtube.com/watch?v=Y7kjsb7iyms
http://www.stickk.com/about.php
Concepts
• Exponential vs. present-biased (hyperbolic)
discounting
• Ways to measure discounting/time preference
experimentally
• Time-consistency vs. time-inconsistency
• Procrastination
• Sophisticates vs. naives
• “Commitment device”
Role of naiveté on future self-control
𝑏2
Underestimate the
consumption of the leisure
good
𝑏1
Overestimate the
consumption of the
investment good
𝑏1 + 𝛿𝑏2 = 0
𝑏1 + 𝛽𝛿𝑏2 = 0
𝑏1 + 𝛽𝛿𝑏2 ≥ 0
with 𝛽 > 𝛽
Experiments on Time Inconsistency
Deadlines and Performance:
Ariely & Wortenbroch, Psych Science
Study 1: 51 MIT Sloan School exec-MBA. students.
Submission of 3 papers
1% grade penalty for late submission
One section given evenly spaced deadlines. One section can
choose.
68% of the 2nd group chose to self-impose deadlines earlier
than the last day of semester =>EVIDENCE FOR WHAT?
• Grades were also better with imposed even
deadlines.
• Grades also worse in the final project on the
self-deadline-setting group.
• Could it be because people perceive selfimposed deadlines vs. external deadlines
differently (although there was a penalty?)—
how can you check?
• Potential problems?
Deadlines
Study 2: Proofreading task. 3 assignments, over
21 days. Paid according to quality. Delay: you
lose money every day.
Treatment 1: Evenly-spaced deadlines
Treatment 2: Can choose 3 deadlines
Treatment 3: No deadlines (anytime within 21
days)
Deadlines and Performance
Field Experiments
• SEED Account: Restricts choices, does not
compensate them in any way. Same interest rate.
• Respondents randomly assigned into groups.
• “Natural field experiment”=>Subjects do not
know they are in an experiment
• Hypothetical questions on time discounting (to
identify people with time-inconsistent
preferences). Over money, rice, ice-cream
e.g.
200 guaranteed today vs. 300 guaranteed next
month?
200 in 6 mo. vs. ……?
• Notes: Could set a date-based goal or amountbased goal (can’t withdraw until….)
• Also can get a locked box to deposit money at
home; key at the bank.
Research Questions
Will anyone take up the SEED product? Who
will?
Will it have a significant effect on (overall)
savings?
Compare SEED to marketing treatment
(commitment vs. encouragement)
Results
• 24 % of people offered take up the SEED
account.
• Survey responses being hyperbolic (timeinconsistent) predicts take-up of SEED for
women. The effect is of the correct sign but
not significant for men.
Savings and commitment
•
Ashraf, Karlan and Yin (2006) conducted a natural field experiment in
Philippines to test the demand for illiquid savings as a commitment device.
•
Three randomized groups:
 Commitment-treatment group (# of subjects =842): were offered a pure
commitment savings product, called SEED (Save, Earn, Enjoy Deposits) that
restricted access to deposits, but didn’t compensate the client for the restricts.
 Marketing-treatment group (# of subjects = 466): received a special visit to
encouarge savings using existing savings products only.
 Control group (# of subjects = 469):
•
Out of 842 people in the commitment treatment, 202 took up SEED (around
24%)
Little differences in
demographics and key
survey variables across
treatment groups.
Time preferences survey
• In addition, they conduct a (hypothetical) survey to measure time
preferences.
• Sample survey questions:
 (Near-term frame) Would you prefer to receive 200 pesos guaranteed today,
or 300 pesos guaranteed in 1 month?
 (Distant frame) Would you prefer to receive 200 pesos guaranteed in 6
months, or 300 pesos guaranteed in 7 months?
• Three categorizations using time preferences survey:
– “Impatient”: the choice of immediate reward in either frame;
– “Hyperbolic”: the choice of immediate reward in near-term frame with the
choice of delayed reward in distant frame;
– “Patient now and impatient later”: choices in the other direction.
The take up of the
savings products in
the commitment
treatment is
correlated with
hyperbolic
discounting (time
inconsistency) for
women
Another Example (Gine, Karlan, Zinman, 2010):
Commitment device to reduce smoking (CARES)
Sign contract on your own money to stop smoking
Lose money (to charity) if cannot pass a urine test 6
months later.
Test at 6 months, also surprise test at 12 months.
Take-up: 11% of offered
Average client committed about 6 months of
cigarette expenditure into the account.
Anybody offered about 5 percentage pts. more
likely to pass the test in 12 mo’s.
Field Experiments on Commitment
Gym Attendance
Field Experiment on Credit Cards
Look at:
1. Acceptance rate of different types of card
offers
2. Switching behavior: Do you stay with the bank
after the intro period?
#1: Significantly more acceptance of A than F.
(Puzzling because they keep borrowing)
#2: 60% do not switch.
People underrespond to the post-teaser interest
rate. Why?
Truncation at 21 months?
Very high discount factor?
Sophistication?
Naivete? (Naives overestimate switching,
underestimate amount of borrowing)
Also under-response to the length of intro period.
Why?