699 research outputs found
Measuring time preferences
We review research that measures time preferencesāi.e., preferences over intertemporal tradeoffs. We distinguish between studies using financial flows, which we call āmoney earlier or laterā (MEL) decisions and studies that use time-dated consumption/effort. Under different structural models, we show how to translate what MEL experiments directly measure (required rates of return for financial flows) into a discount function over utils. We summarize empirical regularities found in MEL studies and the predictive power of those studies. We explain why MEL choices are driven in part by some factors that are distinct from underlying time preferences.National Institutes of Health (NIA R01AG021650 and P01AG005842) and the Pershing Square Fund for Research in the Foundations of Human Behavior
Optimal Defaults and Active Decisions
Defaults can have a dramatic influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such "active decisions" in the context of 401(k) saving. We find that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take three years to achieve under standard enrollment. We also present a model of 401(k) enrollment and characterize the optimal enrollment regime. Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences that are highly heterogeneous. Naive beliefs about future time-inconsistency strengthen the normative appeal of the active-decision enrollment regime. However, financial illiteracy favors default enrollment over active decision enrollment.
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Optimal Mortgage Reļ¬nancing: A Closed Form Solution
We derive the ļ¬rst closed-form optimal reļ¬nancing rule: Reļ¬nance when the current mortgage interest rate falls below the original rate by at least [Ļ + W (ā exp (āĻ))].
In this formula W(.) is the Lambert W-function,
Ļ = ,
Ļ = 1 + Ļ (Ļ + Ī»), Ļ is the real discount rate, Ī» is the expected real rate of exogenous mortgage repayment, Ļ is the standard deviation of the mortgage rate, Īŗ/M is the ratio of the tax-adjusted reļ¬nancing cost and the remaining mortgage value, and Ļ is the marginal tax rate. This expression is derived by solving a tractable class of reļ¬nancing problems. Our quantitative results closely match those reported by researchers using numerical methods.Economic
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The Fourth Law of Behavior Genetics
Behavior genetics is the study of the relationship between genetic variation and psychological traits. Turkheimer (2000) proposed āThree Laws of Behavior Geneticsā based on empirical regularities observed in studies of twins and other kinships. On the basis of molecular studies that have measured DNA variation directly, we propose a Fourth Law of Behavior Genetics: āA typical human behavioral trait is associated with very many genetic variants, each of which accounts for a very small percentage of the behavioral variability.ā This law explains several consistent patterns in the results of gene-discovery studies, including the failure of candidate-gene studies to robustly replicate, the need for genome-wide association studies (and why such studies have a much stronger replication record), and the crucial importance of extremely large samples in these endeavors. We review the evidence in favor of the Fourth Law and discuss its implications for the design and interpretation of gene-behavior research.Economic
Whither Capitalism? Financial externalities and crisis
As with global warming, so with financial crises ā externalities have a lot to answer for. We
look at three of them. First the financial accelerator due to āfire salesā of collateral assets -- a
form of pecuniary externality that leads to liquidity being undervalued. Second the ārisk-
shiftingā behaviour of highly-levered financial institutions who keep the upside of risky
investment while passing the downside to others thanks to limited liability. Finally, the
network externality where the structure of the financial industry helps propagate shocks
around the system unless this is checked by some form of circuit breaker, or āring-fenceā.
The contrast between crisis-induced Great Recession and its aftermath of slow growth in the
West and the rapid - and (so far) sustained - growth in the East suggests that successful
economic progress may depend on how well these externalities are managed
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Money Earlier or Later? Simple Heuristics Explain Intertemporal Choices Better Than Delay Discounting Does
Heuristic models have been proposed for many domains involving choice. We conducted an out-of-sample, cross-validated comparison of heuristic models of intertemporal choice (which can account for many of the known intertemporal choice anomalies) and discounting models. Heuristic models outperformed traditional utility-discounting models, including models of exponential and hyperbolic discounting. The best-performing models predicted choices by using a weighted average of absolute differences and relative percentage differences of the attributes of the goods in a choice set. We concluded that heuristic models explain time-money trade-off choices in experiments better than do utility-discounting models.Economic
The Price of Uncertainty in Present-Biased Planning
The tendency to overestimate immediate utility is a common cognitive bias. As a result people behave inconsistently over time and fail
to reach long-term goals. Behavioral economics tries to help affected individuals
by implementing external incentives. However, designing robust
incentives is often difficult due to imperfect knowledge of the parameter
Ī² ā (0, 1] quantifying a personās present bias. Using the graphical model
of Kleinberg and Oren [8], we approach this problem from an algorithmic
perspective. Based on the assumption that the only information about
Ī² is its membership in some set B ā (0, 1], we distinguish between two
models of uncertainty: one in which Ī² is fixed and one in which it varies
over time. As our main result we show that the conceptual loss of effi-
ciency incurred by incentives in the form of penalty fees is at most 2
in the former and 1 + max B/ min B in the latter model. We also give
asymptotically matching lower bounds and approximation algorithms
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