David Laibson - US grants

Formulating effective social policy requires careful analysis of the intertemporal decisions that individuals make. For example, responding to social problems like drug use, criminal activity, teenage pregnancy, and high-school failure, requires understanding of the intertemporal decisions that contribute to these outcomes. Enhancing the understanding of intertemporal choices is the focus of this study. It will emphasize interdisciplinary research projects motivated by behavioral anomalies in intertemporal decision-making. Each project analyzes a new model of intertemporal choice suggested by evidence and experiments in the psychology literature. These psychological models will be evaluated using standard economic analysis. This study involves three different research projects. The first project analyzes the behavior of decision-makers with hyperbolic discount functions. Hyperbolic discount functions suggest a multiple-self interpretation of intertemporal decision-making, generating an interesting framework for understanding phenomena like self-control. The second proposes a physiological microfoundation for environmentally dependent motivational states or drives. This project uses physiological theories of homeostasis and Pavlovian conditioning to build a theory of endogenous motivational states. For example, the model proposed here explains how environmental cues elicit drives for instantaneous gratification. Finally, the third project builds on the psychology literature about over optimism. This project examines the behavior of decision makers with over optimistic priors and considers the consequences for consumption behavior.

Despite the fact that the majority of savings decisions are made at the household level, very little is understood about how spouses with different time preferences make decisions about allocating money. There is little empirical work on intra-household financial decision-making, often because it is hard to elicit honest responses from both spouses about what happens within the household through survey questions. This project uses both laboratory experiments and household surveys carried out in Mindanao, the Philippines; the research elicits time preference of both spouses, as well as fear of expropriation and trust with financial decisions in the household, under randomly varied conditions of privacy, spousal presence, and negotiation with one's spouse.

This study is among the first to bring spouses into the lab to make financial decisions and to correlate their laboratory outcomes with household-level variables about savings and assets. It provides a new application of experimental methodology to advance understanding of intra-household decision making, and has implications for decreasing conflict and overcoming obstacles to mobilize savings at the household level. Gaining a better understanding of intra-household dynamics is critical to ensuring that programs aimed at improving livelihood have a more sustainable and balanced impact.

This award funds laboratory experiments testing the effect of expectations on reference points and intertemporal choice.
Reference dependent utility models (for example, prospect theory) have been widely applied as alternatives to the expected utility models widely used by economists. However, there is little evidence on how the reference point is actually determined. Previous researchers have often assumed that the reference point is the status quo, but recently other economists and decision scientists have argued that reference points are determined by expectations of future outcomes. The coPI and a collaborator have recently developed empirical evidence that expectations do indeed determine the reference point in a static decision making context. This new project considers how expectations affect choice in a dynamic intertemporal context.

The research provides new evidence on how individuals make intertemporal choices while also distinguishing between competing theories of reference-dependent preferences. The study of intertemporal choice has been a fertile field of research, as evidence has mounted that suggests that individuals have time inconsistent preferences: instead of discounting utility at a constant rate, many individuals appear to have a discount rate that declines with time. Such preferences can lead to internal conflict, over-consumption in the present, and a desire to use commitment devices to bind future behavior. At the same time, some theories of reference dependent preferences also predict that individuals will over-consume in the present because they desire to give themselves favorable surprises. The new research funded by this award manipulates expectations at various points in time to determine whether intertemporal choices are affected as predicted by reference-dependent preference theories.
By providing evidence on how reference points are determined over time, this project enables researchers to make better use of reference dependent models in analyzing economically important behaviors such as labor supply, savings decisions, and whether or not to purchase insurance.
The broader impacts of this research include the design of more effective interventions (by policy makers and by individuals) aimed at encouraging individual behavior change and self control.