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Alex Groves, ECARES Print
Friday, 08 November 2013, 12:15 - 13:15

Alex Groves, ECARES

Identifying what Is Tempting

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Abstract: An individual who is particularly impatient for consumption now at the expense of consumption later, but less impatient between any two dates in the future is said to exhibit present bias. A hypothesis for the cause of present bias is that immediate consumption is subject to temptation, whereas future consumption is not. Under this hypothesis an individual's level of present bias is a combination of what she is tempted to do and the amount of self-control she uses to avoid succumbing to this temptation. I show that this combination is not well defined: it could be that she is tempted to consume everything she has available right now, but she controls herself; that her temptation is more mild and she succumbs to it completely; or something in between. I then present an algorithm that is able to disentangle this combination by eliciting the maximum price she will pay for commitment and her present bias. This works because for a given level of present-bias commitment becomes more valuable as the effort required to control one's self increases. The knowledge of what is tempting and how well people control themselves has implications for the design of contracts, retirement savings plans, microfinance institutions, and consumer credit.

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