In models of optimal savings with income uncertainty and habit formation, people
should save early to create a buffer stock, to cushion bad income draws and limit
the negative internality from habit formation. In experiments in this setting,
people save too little initially, but learn to save optimally within four repeated
lifecycles, or 1-2 lifecycles with “social learning.” Using beverage rewards (cola)
to create visceral temptation, thirsty subjects who consume immediately
overspend compared to subjects who only drink after time delay. The relative
overspending of immediate-consumption subjects is consistent with hyperbolic
discounting and dual-self models. Estimates of the present-bias choices are
β=0.6-0.7, which are consistent with other studies (albeit over different time
horizons)
