Introduction to the dual-self model of choice

Dr. Russell James IIITexas Tech University

An alternative model

• Previous discussion shows that the rational, utility-maximizing assumption for consumers is not always true.

• So, now what?– Throw it out the door?– But, it often makes accurate predictions

• A modification from behavioral economics

“Our theory proposes that many sorts of decision problems should be viewed as a game between a sequence of short-run impulsive selves and a long-run patient self.”

Drew Fudenburg (Harvard U.) and David K. Levine (Washington U.), 2006, A dual-self model of impulse control. American Economic Review, 96(5), 1449-1476.

Fudenberg & Levine (2006)

Long-run (patient) self• This side tries to

maximize utility across time

Short-run (impulsive) selves• Sequential selves that exist

only for a brief time• Each cares only about

immediate experience

Experiment Time!

This is real. One of you will be picked to receive one of the choices you selected.

Choice One

Pick oneA) You can receive $1.00 (cash) on the second to

last day of this class.B) You can receive $1.05 (cash) on the last day

of this class.

Choice Two

Pick one. One week prior to the last day of class, you can have during class either

A) TangerineB) Chocolate Bar

The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)

It’s now time!

Get ready, someone is about to get a nice giveaway!

Choice Three

Pick one. Right now, you can have eitherA) TangerineB) Chocolate Bar

The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)

Choice Four

Pick oneA) You can receive $1.00 (cash) right now.B) You can receive $1.05 (cash) during the next

meeting of this class.

Research ResultsRead & van Leeuwen (1998). 200 participants. People who were not hungry, chose the unhealthy snack for delivery in one week

26% of the timeThey chose the unhealthy snack for immediate consumption

70% of the time

← Next Week

Right Now → 26%

70%

Dual-self

Long-run (patient) self• This side tries to

maximize utility across time

Short-run (impulsive) selves• Sequential selves that exist

only for a brief time• Each cares only about

immediate experience

Discussion

← Next Week

Right Now → 26%

70%

Short-run (impulsive) selvesDoes the short-run self care about• Future consumption next week?• Future health consequences? • Immediate consumption choice?

DiscussionDiscuss with a neighbor and vote in a moment.Does this result fit better with simple rational decision-making or a two-system approach? A) Simple rational decision makingB) Two system “dual-self” decision making

(long-run/patient self and short-run/impulsive selves)

← Next Week

Right Now → 26%

70%

Class vote comparison

How many voted for chocolate at the end of the semester?Fall 2009 – 62.7% (n=86)

How many voted for chocolate right now?Fall 2009 – 64.8% (n=74)

Hyperbolic discounting

• Would you rather receive $100 right now or $101 in a week? Most people choose $100 right now.

• But when the choice is between $100 a year from now and $101 in a year and a week from now, most people choose $101 in a year and a week.

• This is time inconsistent, as both choices involve delaying by one week for $1.

Note also that choosing $100 right now implies an interest rate charge of 1% per week or APR of 52%

Discussion

Now v. later

Short-run (impulsive) selvesDoes the short-run self care about• Immediate money?• Two different future money

options?

Later v. much later

Class vote comparison

• How many voted to take the $1 on the second to last day of the class (instead of $1.05 on the last day)?

Fall ‘09: 32.2% (n=87)• How many voted to take the $1 right now

(instead of $1.05 in the next class meeting)?Fall ‘09: 66.3% (n=86)

What is the implied interest rate being charged to those who chose the immediate $1?Next class in 2 days. 5% difference. APR = (365/2) X 5% ≈ 912%

Thoughts to ponder

Could the willingness of some to ignore a 920% interest rate for immediate reward have implications for consumer use of credit?

Could the variations in the healthiness of food choices have implications for consumer food choices?

More later…

Slides by: Russell James III, J.D., Ph.D., CFP®Associate Professor Division of Personal Financial Planning Texas Tech Universityrussell.james@ttu.edu

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The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component