The curious economics of temptation.

The economic mysteries of daily life.
Nov. 25 2006 5:49 AM

I Want It Now!

The curious economics of temptation.

One of my daughter's favorite bedtime stories is A Birthday for Frances. I like it, too, for the charming illustrations, hilarious dialogue, and instruction in cutting-edge behavioral economics.

Frances, the story's young heroine, secures an advance on her allowance in order to buy bubblegum and a Chompo bar as a birthday present for her little sister Gloria. Yet, as she returns with her father from the sweet shop, Chompo bar in hand, Frances begins to think of all kinds of reasons why she, not Gloria, should eat the chocolate.

"You would not eat Gloria's Chompo bar, would you?" asks her father, anxiously. "It is not Gloria's yet," replies Frances, but her reply is muffled because she is already chewing on Gloria's bubblegum.

Traditional economists would read Frances' behavior as being purely Machiavellian: She lied to her parents to get her hands on chocolate that she never dreamed of giving to her sister. Most normal people would take a kinder view of Frances' failings: She intended to give the candy to Gloria, but when it was actually in her hands, the temptation to eat it herself became overwhelming.

Mainstream economics has no way to describe Frances' behavior, because it assumes people are impatient in a consistent way: If I would rather have $110 on Dec. 6 than $100 on Dec. 5, then logically I would always be happy to wait a day for a gain of 10 percent, and I would rather have $110 tomorrow than $100 now.

Most people do not actually behave like this. The "now" has a strong pull. Almost everybody says they are happy to wait a day at some future time, but not today. They would prefer $100 today to $110 tomorrow and, while they say they would prefer $110 on Dec. 6, come Dec. 5, if you ask them again, they will change their minds, just as Frances did.

It is possible to model such preferences in economic models—in fact, this year's Nobel laureate, Edmund Phelps, did so in a paper with Robert Pollak back in 1968—but they have only recently flowered into a full set of explorations and calibrations by economists such as David Laibson of Harvard and Matthew Rabin, who is one of a very small number of economists to have won the John Bates Clark Medal. (Steven Levitt, Joseph Stiglitz, and Paul Krugman are other winners.)

One of the results of the recent research is that we have a sense of just how strong the pull of the now actually is. The answer is that anything on offer right now is worth half as much, again, as it would otherwise be; that also means that any immediate cost, such as the pain of going to the gym, is similarly inflated. (That is, you'd much rather go to the gym next week than today.) Of course, the costs will vary across people and across temptations, but that seems to be a consistent finding.

These insights can be used to help people make better decisions. For example, economist Richard Thaler has proposed a plan called "Save More Tomorrow," in which employees make commitments to contribute to their pensions not now, but later. Early trials show dramatic success in increasing contributions.

In that particular case, it seems obvious that Thaler is helping people make the decisions they really want to make. But not all such pre-commitment devices are as successful: Just think of all the people who join gyms and never exercise or subscribe to highbrow journals they never read.

So, we are still far from understanding how much sophisticated people will or should plan to deal with their own likely failings. Frances was perhaps too young to realize that when the Chompo bar was in her hand, she would submit to temptation. Sometimes the rest of us do better; sometimes not.

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