Intertemporal Choice and Self-Control

Intertemporal Choice and Self-Control

Intertemporal choice and self-control How do people make choices between "now" and "later"? Behavioral economics reveals systematic deviations from the rational discounting model. Hyperbolic Discounting Exponential discounting (rational): constant discount rate over time. Hyperbolic discounting (real): disproportionately high discounting of the near future. Example: $100 today vs $110 tomorrow — people choose today $100 in a year vs $110 in a year and a day — indifferent Inconsistency! Present Bias Preference for the present: immediate pleasures are overvalued. Consequences: Procrastination Insufficient savings Unhealthy behavior (overeating, smoking) Excessive debt Commitment Devices Precommitments: to restrict future options today. Examples: Automatic savings Penalties for early withdrawal Public promises For the investor Long-term investment: systems that minimize impulsive decisions. Automation: regular investments, rebalancing. Understanding consumers: subscription models, fintech use these insights.