Lecture 13–14: Present Bias. Flashcards
(13 cards)
What is present bias?
The tendency to give stronger weight to immediate rewards over future ones, leading to time-inconsistent decisions.
How does present bias deviate from standard economic models?
Standard models assume exponential discounting with time-consistent preferences. Present bias leads to quasi-hyperbolic discounting.
What is the $\beta\delta$ model?
A model capturing present bias: 𝑈 = 𝑢(𝑐_1) + 𝛽𝛿𝑢(𝑐_2) + 𝛽𝛿^2𝑢(𝑐_3) + … where $\beta < 1$ captures present bias, and $\delta$ is the standard discount factor.
What is time inconsistency?
When preferences change over time in a way that leads people to violate their own future plans.
What’s the difference between naïve and sophisticated present-biased individuals?
Naïve: Fail to anticipate future self-control problems. Sophisticated: Recognize their bias and may use commitment devices.
Give an example of a commitment device.
Automatic savings plans, gym contracts, or deadlines — tools to restrict future behavior in line with long-term goals.
What is hyperbolic discounting?
A model where discount rates decline over time — steep discounting between now and soon, but much less between two future dates.
What real-world behaviors are explained by present bias?
Credit card debt accumulation, under-saving for retirement, procrastination, failure to exercise or diet consistently.
What evidence supports present bias in credit markets?
Meier & Sprenger (2010): Present-biased individuals are more likely to carry costly revolving debt.
How does default enrollment in retirement plans relate to present bias?
Present-biased individuals procrastinate on enrolling; automatic enrollment increases participation (Madrian & Shea, 2001).
What is the ‘fruit vs. chocolate’ experiment?
Participants choose healthy fruit for the future but pick chocolate when the choice is immediate — showing time-inconsistent preferences.
Why can monetary discounting be misleading?
When borrowing/lending is possible, preferences over money may not reflect time preferences — real effort tasks are better measures.
What does the ‘delta’ parameter represent in discounting models?
The standard rate at which future utility is discounted — related to long-run patience.
