Choice Over Time

Choice Over Time

George Loewenstein
Jon Elster
Copyright Date: 1992
Published by: Russell Sage Foundation
Pages: 424
https://www.jstor.org/stable/10.7758/9781610443654
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  • Book Info
    Choice Over Time
    Book Description:

    Many of our most urgent national problems suggest a widespread lack of concern for the future. Alarming economic conditions, such as low national savings rates, declining corporate investment in long-term capital projects, and ballooning private and public debt are matched by such social ills as diminished educational achievement, environmental degradation, and high rates of infant mortality, crime, and teenage pregnancy. At the heart of all these troubles lies an important behavioral phenomenon: in the role of consumer, manager, voter, student, or parent, many Americans choose inferior but immediate rewards over greater long-term benefits. Choice Over Time offers a rich sampling of original research on intertemporal choice—how and why people decide between immediate and delayed consequences—from a broad range of theoretical and methodological perspectives in philosophy, political science, psychology, and economics. George Loewenstein, Jon Elster, and their distinguished colleagues review existing theories and forge new approaches to understanding significant questions: Why do people seem to "discount" future benefits? Do individuals use the same decision-making strategy in all aspects of their lives? What part is played by situational factors such as the certainty of delayed consequences? How are decisions affected by personal factors such as willpower and taste? In addressing these issues, the contributors to Choice Over Time address many social, economic, psychological, and personal time problems. Their work demonstrates the predictive power of short-term preferences in behavior as varied as addiction and phobia, the effect of prices on consumption, and the dramatic rise in debt and decline in savings. Choice Over Time provides an essential source for the most recent research and theory on intertemporal choice, offering new models for time preference patterns—and their aberrations—and presenting a diversity of potential solutions to the problem of "temporal myopia."

    eISBN: 978-1-61044-365-4
    Subjects: Economics, Political Science, Psychology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Contributors
    (pp. vii-viii)
  4. Preface
    (pp. ix-xxiv)
  5. PART ONE Historical Overview
    • 1 The Fall and Rise of Psychological Explanations in the Economics of Intertemporal Choice
      (pp. 3-34)
      George Loewenstein

      In recent years, despite lingering skepticism, the influence of psychology on economics has steadily expanded. Challenged by the discovery of individual and market level phenomena that contradict fundamental economic assumptions, and impressed by theoretical and methodological advances, economists have begun to import insights from psychology into their work on diverse topics. This influence has been most pronounced in the area of decision making under uncertainty, but recently it has extended to the cognate topic of intertemporal choice.

      Economists have joined psychologists in using experimental methods to address fundamental questions about time preference. Moving beyond the usual attempts to measure discount...

    • 2 Intertemporal Choice and Political Thought
      (pp. 35-54)
      Jon Elster

      Most work on intertemporal choice has been done within philosophy, psychology, and economics. Much of it is surveyed elsewhere in this book. In this chapter I discuss how issues of myopia, deferred gratification, and self-control have been discussed within political theory. I first consider political constitutions as examples of imperfect rationality, that is, as devices of precommitment against future weakness of will. To the extent that constitutions are considered as devices, that bind later generations, we may inquire into the optimal tightness of the bounds as well as the optimal difficulty of untying them. Next I survey at some length...

  6. PART TWO General Perspectives
    • 3 Hyperbolic Discounting
      (pp. 57-92)
      George Ainslie and Nick Haslam

      Of the many striking psychiatric syndromes known to man, the most dramatic is the multiple, orsplit, personality. Unrelated to coincidentally named schizophrenia, theego-splittingof multiple-personality disorder confronts its sufferers with sudden shifts of values, plans, behaviors, ideas, and, indeed, everything that forms the human character (Putnam, 1989). Where some of these values and plans are incompatible with others, one set is apt to disappear from the patient’s ken while he is under the influence of the incompatible set; alternatively, the patient seems to go about while under the influence of one set destroying the other-giving away valuable possessionns,...

    • 4 Irrationality, Impulsiveness, and Selfishness as Discount Reversal Effects
      (pp. 93-118)
      Howard Rachlin and Andres Raineri

      Imagine two rewards, one clearly preferable to the other-for instance, a large candy bar versus a small candy bar—offered to a child. As long as the large and small candy bars are offered at the same time, the child prefers the large one. Imagine that the preferred reward was not available until tomorrow. The child may well prefer the small candy bar now to the large one tomorrow. Imagine that the temporal difference between the rewards is held constant but that both are further delayed—the child is offered a choice between the small candy bar a week from...

    • 5 Anomalies in Intertemporal Choice: Evidence and an Interpretation
      (pp. 119-146)
      George Loewenstein and Drazen Prelec

      Since its introduction by Samuelson in 1937, the discounted utility model (DU) has dominated economic analyses of intertemporal choice. In its most restrictive form, the model states that a sequence of consumption levels, (co,…,cT), will be preferred to sequence (co′,…,cT′), if and only if,

      $ \sum_{t = o}^T \text{\delta} \, ^tu(c_t) \, > \, \sum_{t = o}^T \text{\delta} \, ^tu(c_t^\prime), $

      whereu(c) is a concave ratio scale utility function, and δ is the discount factor for one period. DU has been applied to such diverse topics as savings behavior, lobor supply, security valuation, education decisions, and crime. It has provided a simple, powerful frame-work for analyzing a broad range of economic decisions with delayed consequences....

    • 6 Delay of Gratification in Children
      (pp. 147-164)
      Walter Mischel, Yuichi Shoda and Monica L. Rodriguez

      For almost a century the infant has been characterized as impulse-driven, pressing for tension reduction, unable to delay gratification, oblivious to reason and reality, and ruled entirely by a pleasure principle that demands immediate satisfaction (Freud, 1959). The challenge has been to clarify how individuals, while remaining capable of great impulsivity, also become able to control actions for the sake of temporally distant consequences and goals, managing at least sometimes to forgo more immediate gratifications to take account of anticipated outcomes. The nature of this future-oriented self-control, which develops over time and then coexists with more impetuous behaviors, has intrigued...

  7. PART THREE Self-Control
    • 7 Self-Command: A New Discipline
      (pp. 167-176)
      T. C. Schelling

      In a cocaine addiction center in Denver, patients are offered an opportunity to submit to extortion. They may write a self-incriminating letter, preferably a letter confessing their drug addiction, deposit the letter with the clinic, and submit to a randomized schedule of laboratory tests. If the laboratory finds evidence of cocaine use, the clinic sends the letter to the addressee. An example is a physician who addresses a letter to the State Board of Medical Examiners confessing that he has administered cocaine to himself inviolation of the laws of Colorado and requests that his license to practice be revoked. Faced...

    • 8 Self-Control
      (pp. 177-210)
      George Ainslie and Nick Haslam

      Chapter 3 presents evidence that a person does not “have” a preference, in the sense of a disposition to choose that is stable unless acted upon. Viewed over even short periods of time, he is a population of successive preferences. We argue in that chapter that successively dominant rewards cannot be weighed against each other, but give rise tointerests, sets of behaviors to obtain these rewards. The conflict he experiences at a given moment is among incompatible interests, each based upon a reward that is preferred at some times and that, thus, has some likelihood of occurring. Interests canbe described...

  8. PART FOUR Internalities
    • 9 Utility from Memory and Anticipation
      (pp. 213-234)
      Jon Elster and George Loewenstein

      Although not a central focus of economics, the idea that people derive pleasure and pain from other people’s experiences is widely accepted by economists. Duesenberry’s “relative income hypothesis,”¹ Leibenstein’s “bandwagon, snob and Veblen effects,”² Robert Frank’s work on the market for status,³ and Roth ’s research on social comparison in experimental games4 attest to the wide range of economic implications that stem from such second-order effects. What is less well recognized, although perhaps equally consequential for economics, is the idea that we derive utility not only from contemplating others’ experiences, but also from contemplating our own at other times. As...

    • 10 Melioration
      (pp. 235-264)
      Richard J. Herrnstein and Drazen Prelec

      Economic theory assumes that people’s choices are efficient, in the sense that they can be interpreted as, flowing from constrained maximization of a well-defined objective function. However, a growing body of evidence from both human and animal choice experiments points to systematic departures from optimal choice, departures that typically do not diminish with prolonged exposure to the experimental situation. A common finding is that instead of equalizing

      We present a theorymeliorationthat formalizes this pseudomaximizing search for higher average values. The choices predicted by melioration are reasonably efficient in some situations, markedly inefficient in others. An experiment is described...

    • 11 The Role of Moral Sentiments in the Theory of Intertemporal Choice
      (pp. 265-284)
      Robert H. Frank

      The standard neoclassical theory of intertemporal choice begins with the assumption that people are rational, which means that they act as if trying to maximize a discounted flow of utility. At least two types of rationality are distinguished according to the types of motives people hold (see Parfit, 1984). Under the “present-aim” standard, persons are rational if they are efficient in the pursuit of whatever aims they happen to hold at the moment of action. No attempt is made, under this standard, to assess the rationality of the aims themselves. The competing concept of rationality is called theself-intereststandard....

  9. PART FIVE Applications and Extensions
    • 12 Mental Accounting, Saving, and Self-Control
      (pp. 287-330)
      Hersh M. Shefrin and Richard H. Thaler

      Modigliani and Brumberg’s life-cycle theory of saving (1954) (and the similar permanent income hypothesis by Milton Friedman [1957]) is a classic example of economic theorizing. The life-cycle (LC) model makes some simplifying assumptions in order to be able to characterize a well-defined optimization problem, which is then solved. The solution to that optimization problem provides the core of the theory.

      Attempts to test the LC hypothesis have met with mixed success. As summarized by Courant, Gramlich, and Laitner (1984), “But for all its elegance and rationality, the life-cycle model has not tested out very well. … Nor have efforts to...

    • 13 A Theory of Addiction
      (pp. 331-360)
      Richard J. Herrnstein and Drazen Prelec

      The complexity of addiction is mirrored in the many disciplines that study it. The chemistry of addictive substances falls in the domain ofbiochemistry, tolerance and withdrawal belong tophysiology; various personality or hereditary predispositions, and the role of stressful events, are jointly addressed by psychology and human genetics; the relation to the poverty, community structure, and the “social matrix” are problems ofsociologyandpolitical science.

      Alongside these various approaches, however, there must also be a theory of addiction that reconciles the ostensibly self-destructive consequences of addiction with the centraleconomicassumption that human action can be understood as...

    • 14 Rational Addiction and the Effect of Price on Consumption
      (pp. 361-370)
      Gary S. Becker, Michael Grossman and Kevin M. Murphy

      Legalization of such substances as marijuana, heroin, and cocaine surely will reduce the prices of these harmful addictive drugs. By the law of the downward-sloping demand function, their consumption will rise, but by how much? According to conventional wisdom, the consumption of these illegal addictive substances is not responsive to price. Limited empirical evidence from the 1970s does not support this view. Nisbet and Vakil (1972) report a price elasticity of demand for marijuana ranging from –1.0 to –1.5 in an anonymous mail questionnaire of U.C.L.A. students. Silverman and Spruill (1977) estimate the price elasticity of demand for heroin in...

    • 15 Frames of Reference and the Intertemporal Wage Profile
      (pp. 371-382)
      Robert H. Frank

      In this chapter, I argue that context has important implications for intertemporal consumption allocations, and for the design of the economic institutions that help support these allocations. More specifically, I will argue that intrapersonal consumption comparisons cause the optimal intertemporal consumption profile to be upward sloping; that in occupations in which the lifetime wage profile is less steep than the optimal consumption profile, the latter requires savings during the early part of the life cycle, and dissavings during the latter part; that interpersonal consumption comparisons and simple self-control problems often make it difficult to achieve the requisite savings; and, finally,...

  10. Index
    (pp. 383-400)