Back to the Present Bias

Back to the Present Bias

Orhan Erdem, Melis Dik
Copyright: © 2021 |Pages: 12
DOI: 10.4018/978-1-7998-2731-3.ch007
OnDemand:
(Individual Chapters)
Available
$37.50
Current Special Offers
No Current Special Offers
TOTAL SAVINGS: $37.50

Abstract

Much of the economic theory in the beginning of the 20th century assumes that people's tastes and preferences are invariant throughout time. However, recent studies show that this assumption cannot be supported by experiments. Humans are more inclined to present outcomes than future ones. Economists name this as present bias, which can formally be defined as the undervaluing of a larger, later reward and the preference for a smaller, sooner reward. Present bias has been considered a crucial element of economic/financial decision-making processes and it is shown to be related to various suboptimal outcomes. Here, the chapter per the authors summarizes several definitions of present bias, reviews the literature on present bias and behavioral based interventions. The chapter points out the importance and the relevance of some recent studies that stand out, as well as their implications for our day-to-day lives and how we can combat present bias.
Chapter Preview
Top

Present Bias Theories And Models

The study of present bias in formalized research stretches back to Samuelson’s seminal paper in (1937). He proposes ways to measure individual utility, in which individual tastes are assumed to be invariant throughout time. This model, commonly referred to as the exponential discounted utility model, discounts all the utilities in time by the same discount factor δ.1 Strotz (1955) begins to explore time inconsistent preferences and concludes the following-- individuals can make a plan for the future, and follow it with certainty. This is called the harmony case, and represents no present biased decision making in an individual-- they make their decisions in the present and stick to it in the future with no changes in time preferences or any similar changes. The present bias counterpart of the harmony case, which he describes as the intertemporal tussle, which

May be inconsistent with the optimizing future behavior of the individual. In this later case, the conflict may not be recognized and… his behavior being inconsistent with his plans, or the conflict may be recognized and solved either by a strategy of precommitment or a strategy of consistent planning.

As we can see, Strotz (1955) even takes the first steps into behavioral interventions to solve what he calls the intertemporal tussle and we now know as present bias. A later section in this chapter will address commitment mechanisms, as well as other behavioral interventions tested in a more modern setting to help reduce present biased behaviors.2

It is worth mentioning Thaler & Shefrin’s (1981) dual-self model, which relies heavily on the principle-agent model of economic theory. This model proposes two selves for people:

Complete Chapter List

Search this Book:
Reset