Impatience as Intertemporal Egoism

Impatience as Intertemporal Egoism Daniel M. Bartels (bartels@uchicago.edu) Center for Decision Research, University of Chicago 5807 S. Woodlawn Ave., Chicago, IL 60637 USA Oleg Urminsky (ourminsk@chicagobooth.edu) University of Chicago Booth School of Business 5807 S. Woodlawn Ave., Chicago, IL 60637 USA a measure of impatience (Ainslie 1975). Thus, we can restate the general question of (im)patience in intertemporal choices as asking why people exhibit such high discount rates (compared to market interest rates or some other norm) in their behavior and to provide a partial account for why people exhibit such different discount rates from each other. We will argue that our understanding of what constitutes a reasonable discount rate (or, more generally, prudent vs. impatient choices) has been limited by the implicit assumption that people should maximize the utility of a constant self over one’s lifetime. The philosopher Derek Parfit (1984) proposed an alternative view: that a decision about consuming now or later should depend not only on the temporal distance between events, but also on the perceived continuity between one’s present and future selves. In this view, the degree of concern one has for one’s future self should be scaled by the degree of “psychological connectedness”—overlap in properties such as beliefs, values, and ideals—held between one’s current and future self. These properties have been proposed to define the mental ties between selves that comprise identity over time (Lewis, 1983; Perry, 1972). We employ the notion of psychological connectedness— drawn from a literature in which there is an ongoing debate over its specifically normative implications (Parfit, 1984; see Dancy 1997 for dissenting views)—to test a descriptive account of people’s intertemporal choices. In our view, the greater the perceived connectedness to the future self, the greater people’s willingness to defer benefits to the future self, all else equal. Conversely, feeling disconnected from the future self will undercut the general motivation to preserve resources for the future self, causing a reduction in patience that is distinct from other factors that affect valuations of present and future outcomes. Abstract We build on a philosophical account of personal identity (Parfit, 1984) which argues that the degree of concern one has for one’s future self may be scaled by the degree of “psychological connectedness”—overlap in properties such as beliefs, values, and ideals—held between one’s current and future self. We pose participants with tradeoffs between consuming a benefit in the near future versus consuming more of that benefit in the distant future. When people’s sense of connectedness with their future self is reduced, they make impatient choices. Introduction Many of the most important and difficult decisions we face in life hinge on the same underlying dilemma: how to choose when trading off consumption or happiness in the immediate future with (more) consumption or happiness delayed to the more distant future. Research on such dilemmas has been broadly defined as concerning choices between one option with higher immediate benefits but lower (or negative) long- term utility and another with lower immediate benefits but higher long-term utility. People’s widely documented tendency to prefer smaller rewards sooner over larger rewards later has been characterized as revealing short-sightedness or impatience (Elster, 1979). In this paper, we focus on a fundamental question raised by the literature on intertemporal choice: why do people’s choices often seem so short-sighted or impatient, and why do people differ in their degree of impatience, as inferred from the choices they make? In particular, we will focus on a subset of such dilemmas—intertemporal choices in which the tradeoffs between short and long-term benefits are made explicit—as an ideal setting in which to investigate the decision processes leading to impatience in decision making across a wide range of future-directed thought and behavior. Economists and psychologists have extensively studied how people make these kinds of intertemporal choices, and have offered metrics for judging the degree to which behavior conforms to or diverges from normative and descriptive models. Much of the work on intertemporal choice has centered on the specific issue of temporal discounting: how people choose between smaller amounts of money or other goods in the immediate future and larger amounts of money or goods to be received at a later date (see Frederick, Loewenstein, and O’Donoghue, 2002 for a detailed review). In this context, the discount rate, the degree to which an outcome loses value by being delayed for a given period of time, can be interpreted as Evidence for high discount rates In the context of intertemporal choice, impatience (or short- sightedness) is exhibited by consistently choosing sooner- smaller options even when the latter option is more than large enough to compensate for the delay (per some normative standard). Normative models (Koopmans, 1960) indicate that the premium needed in order to forego receiving money sooner rather than later (i.e. the discount rate) should depend primarily on how much interest could be earned on the money in the intervening time, taking into account liquidity constraints and economic factors such as inflation. In contrast,