Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 22 of 36 – Frontiers of Microeconomics
Section 16 of 18
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1- the economics of asymmetric information
2- political economy
3- behavioral economics
·a· people aren't always rational
·b· people care about fairness
·c· people are inconsistent over time
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3- Behavioral Economics
·c· People are inconsistent over time
Consider some unpleasant task, such as doing laundry, shoveling snow, or filling income tax forms.
1-Would you (A) prefer to spend 50 minutes doing the task now, or (B) spend 60 minutes doing the task tomorrow?
2-Would you (A) prefer to spend 50 minutes doing the task 90 days later, or (B) spend 60 minutes doing the task 91 days later?
Many people, for
Question -1- choose B
Question -2- choose A
With Question -1- people faced with the choice of doing the task immediately or later often choose to put off doing the task.
With Question -2- people when looking ahead to the future often prefer to minimize the amount of time spent on the unpleasant task.
From the viewpoint of the theory of rational man, this can be puzzling.
Suppose in response to question -2- a person chooses to spend 50 minutes in 90 days.
When the 90th day arrives he is allowed to change his mind.
He then faces question -1- and opts for doing the task the next day
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People often make plans but then fail to keep them.
A smoker promises himself he will quit, but within a few hours of his last cigarette he gives in to cravings and breaks his promise.
A person trying to lose weight promises he will stop eating dessert, but when the dessert cart comes the promise is broken.
In both cases the desire for instant gratification moves the decision maker to abandon his plans.
The consumption-saving decision is a common case where people are inconsistent over time.
Spending provides instant gratification
Saving, like not having the dessert, requires a sacrifice in the present for a future reward.
Just as many overweight individuals wish they ate less, many consumers wish they saved more.
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An implication of this over-time inconsistency is people should try to find ways to commit their future selves to following through on their plans.
What can a person who saves too little do to save more and spend less?
He could find a way to lock up his money so he can’t spend it.
Some retirement accounts, such as 401k plans, do this.
A worker can agree to have some money taken out of his paycheck.
The money is deposited in an account and can be used before retirement only with paying a penalty.
The Social Security system works the same way.
One reason these retirement accounts are popular and justified is because they protect people from their instant-gratification desires.
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