Living Economics

Doing It Now or Later
O'Donoghue & Rabin
People who believe that they will procrastinate when faced with immediate costs and prematurely appropriate immediate rewards may counteract this tendency sometimes to their own benefits.

When presented a choice between doing seven hours of unpleasant activity on April 1 versus eight hours on April 15, if asked on February 1 virtually everyone would prefer the seven hours on April 1. But come April 1, given the same choice, most of us are likely to put off the work until April 15. Such time inconsistency among our past, present, and future preferences is characteristic of all self-control problems.

Because such time inconsistency is a result of always giving more weight to the more immediate moment as it draws closer, it can be called the present-bias effect. Such a bias, however, may lead to different behaviors depending on whether the choices involve immediate costs or immediate rewards. When costs are immediate and rewards are delayed, there is a tendency to procrastinate. When rewards are immediate and costs are delayed, there is a tendency to appropriate the rewards prematurely.

But this present-bias effect may be modified depending on whether people will foresee and counteract their self-control problems. Naive people believe they will behave themselves in the future and will do nothing to counteract the present-bias effect. Thus, they will procrastinate when faced with immediate costs and prematurely appropriate immediate rewards. Sophisticated people believe they may not behave themselves in the future and seek to counteract the present-bias effect. Thus, they will not procrastinate when knowing about future misbehavior increases their perceived cost of current misbehavior. But, they will prematurely appropriate current rewards when knowing about future misbehavior decreases the perceived cost of current misbehavior.

For example, sophistication might help when one wants to quit an addiction. A sophisticated person knows that he will not have an easier problem quitting tomorrow than today. So, he might as well quit today before his health gets any worse. A naive person may repeatedly delay quitting smoking believing he will quit tomorrow. On the other hand, sophistication might hurt when a person is sure he will eventually get addicted. Since he is not going to be better off tomorrow by abstaining today, he might as well indulge himself now.

References:
  • O'Donoghue, T. & M. Rabin. "Doing It Now or Later," American Economic Review, March 1999.
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