Professional Documents
Culture Documents
David Laibson
Harvard University and NBER
July 16, 2008
1. Motivating Experiments
A Thought Experiment
Would you like to have
A) 15 minute massage now
or
B) 20 minute massage in an hour
If you were
deciding today,
would you choose
fruit or chocolate
for next week?
Time
Time
If you were
deciding today,
would you choose
fruit or chocolate
for today?
Time
70%
choose
chocolate
Time
juice now
or
60% of subjects choose first
juice in 20 minutes or 2x
30% of subjects choose first
Conceptual Outline
People are not internally consistent decision-makers
Internal conflicts can be modeled and measured
Scalable, inexpensive policies can transform behavior
Outline
Motivating experimental evidence
Theoretical framework
Field evidence
Neuroscience foundations
Neuroimaging evidence
Study 1: Amazon gift certificates
Study 2: chips and juice
6. Policy analysis
1.
2.
3.
4.
5.
2. Theoretical Framework
Classical functional form: exponential functions.
D(t) = t
D(t) = 1,
Ut = ut + ut+1 ut+2ut+3
But exponential function does not show instant
gratification effect.
Discount function declines at a constant rate.
Discount function does not decline more quickly in
the short-run than in the long-run.
100.00
2.55
0.07
0.00
Building intuition
To build intuition, assume that = and = 1.
Discounted utility function becomes
Ut = ut + ut+1 ut+2ut+3
Discounted utility from the perspective of time t+1.
Ut+1 =
ut+1 + ut+2 ut+3
Discount function reflects dynamic inconsistency:
preferences held at date t do not agree with preferences
held at date t+1.
Exercise
Assume that = and = 1.
Suppose exercise (current effort 6) generates delayed
benefits (health improvement 8).
Will you exercise?
Exercise Today:
Exercise Tomorrow:
-6 + [8] = -2
0 + [-6 + 8] = +1
3. Field Evidence
Della Vigna and Malmendier (2004)
Financial education
Choi, Laibson, Madrian, Metrick (2004)
Seminars presented by professional financial
advisors
Curriculum: Setting savings goals, asset allocation,
managing credit and debt, insurance against
financial risks
Seminars offered throughout 2000
Linked data on individual employees seminar
attendance to administrative data on actual savings
behavior before and after seminar
Non-attendees
%
planning
to make
change
%
actually
made
change
%
actually
made
change
100%
14%
7%
28%
8%
5%
47%
15%
10%
36%
10%
6%
Stochastic Income
Lifecycle variation in labor supply (e.g. retirement)
Social Security system
Life-cycle variation in household dependents
Bequests
Illiquid asset
Liquid asset
Credit card debt
LRT Results:
Ut = ut + ut+1 ut+2ut+3
4. Neuroscience Foundations
% choosing cake
41%
63%
Parietal
cortex
Ut =
(1/)Ut =
ut + ut+1 ut+2ut+3
(1/)ut + ut+1 ut+2ut+3
fronto-parietal cortex
Hypothesis:
Limbic system discounts reward at a higher rate than does the
prefrontal cortex.
discount value
1.0
0.0
mesolimbic system
prefrontal cortex
time
5. Neuroimaging Evidence
McClure, Laibson, Loewenstein, and Cohen
Science (2004)
Do agents think differently about immediate rewards and
delayed rewards?
Does immediacy have a special emotional drive/reward
component?
Does emotional (mesolimbic) brain discount delayed
rewards more rapidly than the analytic (fronto-parietal
cortex) brain?
d>0
d
R
R
Hypothesis: fronto-parietal cortex.
Time
delay
d=0
d
Reward R
R
Hypothesis: fronto-parietal cortex and limbic.
T13
Neural activity
x=4mm
VStr
y=8mm
MOFC
z=4mm
MPFC
PCC
Seconds
0.4%
2s
PMA
RPar
DLPFC
VLPFC
LOFC
x=44mm
0.4%
2s
x=0mm
0
T13
15
Brain Activity
0.05
0.0
0.05
Choose
Smaller
Immediate
Reward
Frontal
system
Emotional
System
Choose
Larger
Delayed
Reward
Open questions
1. What is now and what is later?
Our immediate option (Amazon gift certificate)
did not generate immediate consumption.
Also, we did not control the time of consumption.
2. How does the limbic signal decay as rewards are delayed?
3. Would our results replicate with a different reward domain?
4. Would our results replicate over a different time horizon?
New experiment on primary rewards: Juice
McClure, Ericson, Laibson, Loewenstein, Cohen
(Journal of Neuroscience, 2007)
15s
i
ii
10s
5s
Time
iii
iv. Juice/Water squirt (1s
B
(i) Decision Period
2s
15s
Figure 1
(iii) Pause
Variable Duration
Experiment Design
d
d'-d
(R,R')
P(choose early)
This
minute
10
minutes
20
Minutes
P(choose early)
0.8
0.6
0.6
0.4
0.4
0.2
0.2
This
minute
10
minutes
20
Minutes
d-d = 1 min
d-d = 5 min
This
minute
10
minutes
20
minutes
Limbic
Cortical
Neuroimaging data
Areas that respond primarily to immediate rewards
ACC
PCu
NAcc
x = -12mm
SGC
x = -2mm
PCu
NAcc
ACC
PCC
MOFC/SGC
z = -10mm
x = -8mm
BA10
SMA/PMA
BA9/44
BA46
11
PPar
Vis Ctx
x = 0mm
Ant Ins
x = 40mm
x = -48mm
T
0
Figure 4
x = 0mm
y = 8mm
x = 0mm
x = -48mm
Juice
only
Figure 5
x = -4mm
y = 12mm
x = 0mm
Amazon
only
x = -48mm
Both
(D=0,D'=1)
(D=0,D'=5)
(D=10,D'=11)
(D=10,D'=15)
(D=20,D'=21)
(D=20,D'=25)
Normed Activation
.5
1
1.5
10
15
Time to later reward
Actual
Predicted
20
25
(D=0,D'=1)
(D=0,D'=5)
(D=10,D'=15)
(D=10,D'=11)
(D=20,D'=21)
(D=20,D'=25)
Normed Activation
.5
1
1.5
10
15
Time to later reward
Actual
Predicted
20
25
Outline
Experimental evidence for dynamic inconsistency.
Theoretical framework: quasi-hyperbolic discounting.
Field evidence: dynamic decisions.
Neuroscience:
Mesolimbic Dopamine System (emotional, impatient)
Fronto-Parietal Cortex (analytic, patient)
5. Neuroimaging evidence
Study 1: Amazon gift certificates
Study 2: juice squirts
6. Policy
7. The Age of Reason
1.
2.
3.
4.
6. Policy
Defaults in the savings domain
Welcome to the company
If you dont do anything
You are automatically enrolled in the 401(k)
You save 2% of your pay
Your contributions go into a default fund
Call this phone number to opt out of enrollment
or change your investment allocations
Automatic
enrollment
Standard
enrollment
Fraction of Participants
98% agree
79% agree
97% agree
Source: Harris Interactive Inc.
2005
2004
2003
Outline
1.
2.
3.
4.
5.
6.
End
Overview of defaults
1. Defaults affect all saving and asset
allocation outcomes
2. Four psychological factors jointly
contribute to the default effect
3. How can we identify optimal defaults
4. Alternative interventions (education)
is much less effective
Participation
Contribution rates
Asset allocation
Pre-retirement distributions
Decumulation / annuitization
Default contribution
rate under automatic
enrollment
Financial illiteracy
Endorsement
Complexity
Present-bias
iii. Complexity
Complexity delay
Psychology literature (Tversky and Shafir 1992,
Shafir, Simonson and Tversky 1993, Dhar and
Knowlis 1999, Iyengar and Lepper 2000 )
Savings literature: each additional 10 funds produces
a 1.5 to 2.0 percentage point decline in participation
(Iyengar, Huberman and Jiang 2004)
Also results on complexity generating more
conservative asset allocation (Iyengar and Kamenica
2007).
Quick enrollment experiments
Implementation at Company D
New hires at employee orientation: 2% contribution
rate invested 50% money market / 50% stable value
Implementation at Company E
Existing non-participants: 3% contribution rate
invested 100% in money market fund
Ut =
ut + ut+1 ut+2ut+3
Procrastination (assume
, = 1).
Suppose you can join the plan today (effort cost $50) to
gain delayed benefits $20,000 (e.g. value of match)
Every period you delay, total benefits fall by $10.
What are the discounted costs of joining at different
periods?
Join Today:
Join t+1:
Join t+2:
Join t+3:
-50
0
+
+
0 +
0 +
[0]
[-50 - 10]
[-50 - 20]
[-50 - 30]
= -50
= -30
= -35
= -40
Join Today:
Join t+1:
Join t+2:
Join t+3:
-10
0
0
0
+
+
+
+
[0]
[-10 - 10]
[-10 - 20]
[-10 - 30]
= -10
= -10
= -15
= -20
Join Today:
Join t+1:
Join t+2:
Join t+3:
-10
0
0
0
+
+
+
+
[0]
[-10 - 10]
[-10 - 20]
[-10 - 30]
= -10
= -10
= -15
= -20
Optimal Defaults
Two classes of optimal defaults
Automatic enrollment
Optimal when employees have relatively homogeneous
savings preferences (e.g. match threshold) and relatively
little propensity to procrastinate
High Heterogeneity
30%
Offset
Default
Low Heterogeneity
Active Decision
Center
Default
0%
0
Beta
4. Alternative Policies
Paying employees to save
Educating employees
Financial education
Choi, Laibson, Madrian, Metrick
(2004)
Seminars presented by professional financial
advisors
Curriculum: Setting savings goals, asset allocation,
managing credit and debt, insurance against
financial risks
Seminars offered throughout 2000
Linked data on individual employees seminar
attendance to administrative data on actual savings
behavior before and after seminar
%
actually
made
change
%
actually
made
change
100%
14%
7%
28%
8%
5%
47%
15%
10%
Change asset
36%
10%
6%
%
actually
made
change
%
actually
made
change
100%
14%
7%
28%
8%
5%
47%
15%
10%
Change asset
36%
10%
6%
%
actually
made
change
%
actually
made
change
100%
14%
7%
28%
8%
5%
47%
15%
10%
Change asset
36%
10%
6%
Conclusion
Defaults are not neutral for four reasons: