Lecture #8.pdf - Choice over time Economics 4374(Econ 4374 Lecture 8 Choice over time 1 31 Outline 1 Announcements 2 Choice over time Introduction

Lecture #8.pdf - Choice over time Economics 4374(Econ 4374...

This preview shows page 1 - 9 out of 31 pages.

Choice over time Economics 4374 September 12, 2019 (Econ 4374) Lecture 8 - Choice over time September 12, 2019 1 / 31
Image of page 1
Outline 1 Announcements 2 Choice over time Introduction Exponential discounting 3 Short-Run Desires vs. Long-Run Goals Short-run impatience 4 Issues with Exponential Discounting Longer-run patience Dynamic (in)consistency and hyperbolic discounting Intrapersonal Conflicts 5 Hyperbolic Discounting (Econ 4374) Lecture 8 - Choice over time September 12, 2019 2 / 31
Image of page 2
Announcements Announcements Assignment 4 due next Tuesday. (Econ 4374) Lecture 8 - Choice over time September 12, 2019 3 / 31
Image of page 3
Choice over time Introduction Choice over Time: Introduction How do you choose when to start/finish an assignment? How do you choose when to do something you enjoy? (Go on a date, watch your favorite show, eat the cookies, etc.) Have you ever planned to do something, and then not done it until later? I What? Why? Is there anything you planned to do yesterday, but didn’t? I What? Why? Is there anything you planned to do later, but you’ve already done it? I What? Why? Most non-trivial economic choices involve at least some tradeoffs between costs and benefits that occur at different points in time. Simple example: purchasing an expensive “tool” (app, device, etc.) I Costly money outlay at the beginning (negative utility). I Pain and frustration of learning it (negative utility). I Mastery (positive utility, until it becomes obsolete). In order to determine whether the tool is worth it, you have to weigh these costs and benefits against each other somehow. Key economic examples: savings/investment, education, health. The next part of the course is about these choices. (Econ 4374) Lecture 8 - Choice over time September 12, 2019 4 / 31
Image of page 4
Choice over time Introduction Is this familiar? (Econ 4374) Lecture 8 - Choice over time September 12, 2019 5 / 31
Image of page 5
Choice over time Introduction Is this familiar? (Econ 4374) Lecture 8 - Choice over time September 12, 2019 6 / 31
Image of page 6
Choice over time Exponential discounting Samuelson’s Discounted Utility Model Exponentially discounted utility model When choosing at time t , a person aims to maximize u t + δ u t +1 + δ 2 u t +2 + δ 3 u t +3 + . . . . u t , u t +1 , u t +2 , . . . are instantaneous utilities . They capture how the person feels at the moment. δ (usually 1) is the discount factor . It measures how utility in later periods is discounted relative to earlier periods. The sum is discounted utility . Exponential discounting: utility in a period is always worth δ times utility in the previous period. δ replaces all the complex psychology of how people think about the future. (Econ 4374) Lecture 8 - Choice over time September 12, 2019 7 / 31
Image of page 7
Choice over time Exponential discounting Example: would a student be willing to write her term paper today so as to give herself a single freer evening in the future? Suppose δ = 0 . 9, the instantaneous cost of writing the paper is 1, and the instantaneous benefit of a nicer evening is 4 / 3.
Image of page 8
Image of page 9

You've reached the end of your free preview.

Want to read all 31 pages?

  • Fall '17
  • Willa Friedman

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors