The financial equivalents include trust and pension funds, Christmas Clubs and pre-nuptial agreements. Some economists have called these “golden egg” investments – investments which cannot be realised quickly, so that temptation is constrained. 44 Pre-commitment can also work for non-financial contracts. For example, job contracts could be based on longduration performance measures. These contracts may require a public policy “nudge”. 45 For example, savings schemes might require people to opt out rather than opt in. (d)  Institutional arrangements, and policy frameworks, are another such pre-commitment device. They are a means of resisting the temptation to place shortover long-term policy objectives. Government’s policy preferences, which are derived from people’s preferences, can be hyperbolic too. That is the essence of the policy time-consistency problem. A solution to that problem is to delegate policy to a patient, low discount rate agent. Because central banks have very long horizons, they fit the bill. Increasingly over the course of the past century, central banks have been chosen to safeguard the long-run objectives of price and financial stability, as a means of leaning against short-termist temptations. 42  The Aspen Institute (2009). 43  For example, Securities and Exchange Commission (2010). 44  Laibson (1997). 45  For example, Thaler and Sunstein (2009). BIS Review 114/2010  13  To illustrate some of the benefits of pre-commitment and long-duration investment, imagine having placed that $ stake in 1967 with an investment firm whose motto was “our favourite holding period is forever”.

While patient behaviour is associated with activity in the pre-frontal cortex, impatient behaviour is associated with a distinct part of the brain – the limbic (or midbrain dopamine) system. 9 Humans have distinct patience and impatience “genes”. When making difficult inter-temporal decisions, we are quite literally in two minds. Impatience is no stranger to economics. It was discussed by Neo-Classical economists, such as Marshall, Fisher and Pigou writing over a century ago. Pigou memorably described the tendency of humans to discount excessively future outcomes as a “defective telescopic faculty”. Today, research has gone one step further: discounting is not just myopic but inconsistent through time. This has been given a somewhat less memorable, if mathematically more accurate, moniker by economists – “hyberbolic discounting”. 10 Hyperbolic discounting describes how people’s preferences alter as distant outcomes become closer to the present. Concretely, imagine a person who prefers $ in ten years’ time to $ in nine years’ time. With hyperbolic preferences, this same person would also favour $ in one year’s time to $ in two year’s time. They exhibit inconsistencies in decision-making across time, or so-called preference reversals. The implications of such behaviour are potentially far-reaching. The patient planner becomes a spontaneous doer when outcomes are within reach. The cautious saver becomes a reckless spender when nest eggs are close to hatching. The long-term investor becomes a short-term speculator if assets can be cashed. As temptation beckons, the devil on one shoulder whispers more seductively than the angel on the other.