A review of two behavioral economics concepts that cause systematic misprojection of future behavior in consumer decisions

1. Hyperbolic Discounting andProjection Bias How we misread the future Dr. Russell James III Texas Tech University

2. We can influence the elephant’s behavior by choosing our future environment… So why won’t we do it?

3. Answer: We systematically over-project the rider’s future control of immediate decisions. I’m always in charge. Sure you are. Except when I decide otherwise.

4. Lessons Cold v. Hot Humans systematically mis-project behavior. Projection bias: When in a cold state, we underrate the likelihood of hot state actions. Hyperbolic discounting: We underrate the intensity of future desires Later v. Now

5. Does the future me want different things? Choose among 24 movie videos Some are “low brow” Some are “high brow” Does my choice depend on whether I am picking for tonight, next Thursday, or the following Thursday? Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.

6. Does the future me want different things? Did people choose… More “low brow” movies now, more “high brow” movies for later More “high brow” movies now, more “low brow” movies for later About the same regardless of whether picking for now or later Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.

7. Next week I will want things that are good for me… Choosing for tonight Choosing for next Thursday Choosing for second Thursday Reed, Lowenstein & Kalyanaraman (1999) Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.

8. Does the future me want different things? When choosing between a healthy and unhealthy snack for delivery in one week, do people systematically misproject future desires? ←Next Week-> Predicted preference ←Right Now-> Actual preference D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.

9. Does the future me want different things? Are people More likely to choose the unhealthy snack for next week More likely to choose the unhealthy snack for right now About as likely either way ←Next Week-> Predicted preference ←Right Now-> Actual preference D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.

10. Does the future me want different things? 26% chose the unhealthy snack for delivery in one week right after lunch. 74% ←Next Week-> Predicted preference 26% D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.

11. Does the future me want different things? One week later, when allowed to change their choice at the delivery, 70% chose the unhealthy snack for immediate consumption 74% ←Next Week-> Predicted preference ←Right Now-> Actual preference 26% 30% 70% D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.

12. Hyperbolic discounting This is an example of under-rating the intensity of future desires [hyperbolic discounting]. Preferences vary with time. Future preferences are consistently misprojected. Later v. Now

13. In the future, I expect to prefer the long-term, rational choice. When the future becomes “right now,” I prefer the pleasurable choice! Later v. Now [hyperbolic discounting]

14. Projection Bias: How our current state (hot v. cold) influences projections of our future desires. Cold v. Hot

15. Does the current state of hunger change which snack people will order for delivery next week? Yes, hungry people choose the unhealthy snack Yes, hungry people choose the healthy snack No

16. Projection of future preferences depends on our current state I’m not hungry right now, so next week I will prefer the healthy snack. People asked right after lunch (not hungry), chose the unhealthy snack for delivery in one week right after lunch 26% of the time. People asked four hours after lunch (hungry), chose the unhealthy snack for delivery in one week right after lunch 42% of the time I’m hungry, so next week I will prefer the candy bar. Cold v. Hot

17. Projection bias Cold v. Hot Cold state projects to future cold state I’m not hungry right now, so next week I will prefer the healthy snack just like I do right now. Hot state projects to future hot state I’m hungry, so next week I will prefer the unhealthy choice just like I do right now.

18. Actual future impulsive desires when in a “hot” state in the future Hyperbolic Discounting Projected future impulsive desires when currently in a hot state Actual future impulsive desires when in a “cold” state in the future Projection Bias Hyperbolic Discounting Projected future impulsive desires when currently in a cold state

19. Actual future impulsive desires when in a “hot” state in the future Later v. Now Projected future impulsive desires when currently in a hot state Actual future impulsive desires when in a “cold” state in the future Cold v. Hot Later v. Now Projected future impulsive desires when currently in a cold state

20. Hyperbolic discounting may exceed projection bias Actual future impulsive desires when in a “hot” state in the future Hyperbolic Discounting Actual future impulsive desires when in a “cold” state in the future Projected future impulsive desires when currently in a hot state Hyperbolic Discounting Projection Bias Projected future impulsive desires when currently in a cold state

21. Hyperbolic discounting and projection bias in snack choice 88-92% choose immediately available unhealthy snack when hungry Hyperbolic Discounting 70% choose immediately available unhealthy snack when not hungry 42% pre-order unhealthy snack when hungry Hyperbolic Discounting Projection Bias 26% pre-order unhealthy snack when not hungry

22. Hyperbolic discounting and projection bias in snack choice 88-92% choose immediately available unhealthy snack when hungry Later v. Now 70% choose immediately available unhealthy snack when not hungry 42% pre-order unhealthy snack when hungry Later v. Now Cold v. Hot 26% pre-order unhealthy snack when not hungry

23. An experiment with heroin addicts Heroin addicts in treatment receive a replacement drug. It produces a mild high designed to ward off heroin cravings. A double-dose produces a longer, more intense high. Choice between money or a double-dose, either to be received in five days. G. Badger (U. Vermont), W. Bickel (U. Arkansas), L . Giordano (Duke), E. Jacobs (S. Illinois U.), G. Loewenstein (Carnegie Mellon), L. Marsch (St. Luke’s Hospital, NY), 2007, Altered states: The impact of immediate craving on the valuation of current and future opiods. The Journal of Health Economics, 26, 865-876.

24. Projection bias predicts that heroin addicts… Would forego more money for the promise of an extra dose in 5 days if they were currently craving. Would forego less money for the promise of an extra dose in 5 days if they were currently craving. Would forego more money for an immediate extra dose than for one in 5 days. The state of craving would make no impact because they don’t get the extra dose for 5 more days.

25. When in a HOT state, I act as if I will always be in a HOT state. When in a COLD state, I act as if I will always be in a COLD state.

26. I need a hit now, so next week I will prefer an extra dose to $50. I’m not jonesing now, so next week I will prefer $50 to an extra dose.

27. In the future, I expect to prefer the long-term, rational choice. When the future becomes “right now,” I make the impulsive choice. Hyperbolic discounting with opiates?

28. Hyperbolic discounting and projection bias with opiod When not craving (after first dose) addicts were willing to forego $35 in 5 days for the promise of an extra dose in 5 days. After 5 days, when not craving (after first dose) addicts were willing to forego an immediate $50 for an immediate extra dose. When craving (before first dose) addicts were willing to forego $60 in 5 days for the promise of an extra dose in 5 days. After 5 days, when craving (before first dose) addicts were willing to forego an immediate $75 for an immediate extra dose. Projection bias Hyperbolic Discounting Hyperbolic Discounting

29. Hyperbolic discounting and projection bias with opiod When not craving (after first dose) addicts were willing to forego $35 in 5 days for the promise of an extra dose in 5 days. After 5 days, when not craving (after first dose) addicts were willing to forego an immediate $50 for an immediate extra dose. When craving (before first dose) addicts were willing to forego $60 in 5 days for the promise of an extra dose in 5 days. After 5 days, when craving (before first dose) addicts were willing to forego an immediate $75 for an immediate extra dose. Cold v. Hot Projection bias Hyperbolic Discounting Hyperbolic Discounting Later v. Now Later v. Now

30. After 5 days, willing to forego $75 immediately for an double-hit immediately Hyperbolic Discounting Willing to forego $60 in 5 days for a double-hit in 5 days After 5 days, willing to forego $50 immediately for a double-hit immediately Projection Bias Hyperbolic Discounting Willing to forego $35 in 5 days for a double-hit in 5 days

31. After 5 days, willing to forego $75 immediately for an double-hit immediately Later v. Now Willing to forego $60 in 5 days for a double-hit in 5 days After 5 days, willing to forego $50 immediately for a double-hit immediately Cold v. Hot Later v. Now Willing to forego $35 in 5 days for a double-hit in 5 days

32. In the future, I expect to prefer the long-term, rational choice and quit smoking. When the future becomes “right now,” I keep smoking. Hyperbolic discounting with smoking?

33. Self-predicted future behavior in teenage smoking 15% of light smokers (less than one cigarette per day) in high school predicted they “might” be smoking in 5 years. 15% predicted 5 years later, what percentage were still smoking? Less than 5% 5% to 15% About 15% 15% to 30% Greater than 30% L. Johnston (U. Michigan), P. O’Malley (U. Michigan), J. Bachman (U. Michigan), 1993, Illicit drug use, smoking, and drinking by America’s high school students, college students, and young adults, 1975-1987. National Institute on Drug Abuse: Rockville, Maryland.

34. Self-predicted future behavior in teenage smoking 15% of light smokers (less than one cigarette per day) in high school predicted they “might” be smoking in 5 years. 15% predicted 43% actual 5 years later, 43% were still smoking. L. Johnston (U. Michigan), P. O’Malley (U. Michigan), J. Bachman (U. Michigan), 1993, Illicit drug use, smoking, and drinking by America’s high school students, college students, and young adults, 1975-1987. National Institute on Drug Abuse: Rockville, Maryland.

35. Projection bias in sexual hot states and cold states Question: Can we predict how we will behave when sexually aroused? Study: Male heterosexual college students at UC-Berkeley were asked a series of questions related to sex and relationships. The same men answered in both a non-aroused state and an aroused state on different days, using a 0 to 100 sliding scale. http://www.youtube.com/watch?v=mFMDgW0wDeI (arousal.wmv) Question text here… Possibly NO Yes Ariely, D. (MIT) & Lowenstein, G. (Carnegie Mellon), 2006, The heat of the moment: The effect of sexual arousal on sexual decision making. Journal of Behavioral Decision Making, 19, 87-98.

36. Projection bias in sexual hot states and cold states Would you encourage your date to drink to increase the chance that she would have sex with you?

37. Projection bias in sexual hot states and cold states Would you encourage your date to drink to increase the chance that she would have sex with you? Average non-aroused response: 46 Possibly NO YES

38. Projection bias in sexual hot states and cold states Would you encourage your date to drink to increase the chance that she would have sex with you? Average non-aroused response: 46 Possibly NO YES NO YES Average aroused state response: 63

39. Projection bias in sexual hot states and cold states Would you encourage your date to drink to increase the chance that she would have sex with you? Average non-aroused response: 46 Possibly NO YES Projection bias NO YES Average aroused state response: 63

40. Projection bias in sexual hot states and cold states Would you tell a woman that you loved her to increase the chance that she would have sex with you?

41. Projection bias in sexual hot states and cold states Would you tell a woman that you loved her to increase the chance that she would have sex with you? Average non-aroused response: 30 Possibly NO YES

42. Projection bias in sexual hot states and cold states Would you tell a woman that you loved her to increase the chance that she would have sex with you? Average non-aroused response: 30 Possibly NO YES NO YES Average aroused state response: 51

43. Projection bias in sexual hot states and cold states Would you use a condom even if you were afraid that a woman might change her mind while you went to get it? Does this question have implications for public health? Unwanted pregnancy? STDs? HIV/AIDS?

44. Projection bias in sexual hot states and cold states Would you use a condom even if you were afraid that a woman might change her mind while you went to get it? Average non-aroused response: 86 Possibly NO YES

45. Projection bias in sexual hot states and cold states Would you use a condom even if you were afraid that a woman might change her mind while you went to get it? Average non-aroused response: 86 Possibly NO YES NO YES Average aroused state response: 60

46. Projection bias in sexual hot states and cold states Remember: These differences only show “projection bias.” They do not incorporate in the additional effects of “hyperbolic discounting”. If the real option was actually immediately present, we would expect a much larger gap. Average non-aroused response: 86 Possibly NO YES NO YES Average aroused state response: 60

47. Projection bias in sexual hot states and cold states A condom interferes with sexual spontaneity.

48. Projection bias in sexual hot states and cold states A condom interferes with sexual spontaneity. Average non-aroused response: 58 Possibly NO YES

49. Projection bias in sexual hot states and cold states A condom interferes with sexual spontaneity. Average non-aroused response: 58 Possibly NO YES NO YES Average aroused state response: 73

50. Projection bias in sexual hot states and cold states Would you keep trying to have sex after your date says “no.”

51. Projection bias in sexual hot states and cold states Would you keep trying to have sex after your date says “no.” Average non-aroused response: 20 Possibly NO YES

52. Projection bias in sexual hot states and cold states Would you keep trying to have sex after your date says “no.” Average non-aroused response: 20 Possibly NO YES NO YES Average aroused state response: 45

53. Projection bias in sexual hot states and cold states Would you slip a woman a drug to increase the chance that she would have sex with you?

54. Projection bias in sexual hot states and cold states Would you slip a woman a drug to increase the chance that she would have sex with you? Average non-aroused response: 5 Possibly NO YES

55. Projection bias in sexual hot states and cold states Would you slip a woman a drug to increase the chance that she would have sex with you? Average non-aroused response: 5 Possibly NO YES NO YES Average aroused state response: 26

56. So, why don’t we do it? I’m always in charge. Q: If we could control the elephant’s behavior by choosing our future environment, why don’t we do it? A: We systematically over-project the rider’s future control of immediate decisions. Sure you are. Except when I decide otherwise.

57. Persistently false predictions Fundamental cognitive conflict: Why would you never see this kind of a press conference? http://www.theonion.com/content/video/congressman_offers_preemptive (first 45-60 seconds) We engage in the behavior, but we don’t predict that we will engage in the behavior.

58. Lessons Cold v. Hot Humans systematically mis-project behavior. Projection bias: When in a cold state, we underrate the likelihood of hot state actions. Hyperbolic discounting: We underrate the intensity of future immediate desires Later v. Now

59. Result: Predictably irrational behavioral misprojections “people are generally more accurate in their predictions of what others will do than in their (morally rosier) predictions about what they themselves will do” Haidt, J. (U. Virginia), 2007, The new synthesis in moral psychology. Science, 316, 990. “Researchers have repeatedly demonstrated that people on average tend to think they are more charitable, cooperative, considerate, fair, kind, loyal, and sincere than the typical person but less belligerent, deceitful, gullible, lazy, impolite, mean, and unethical---just to name a few.” Epley, N. (Cornell) & Dunning, D. (Cornell), 2000, Feeling ‘holier than thou’: Are self-serving assessments produced by errors in self- or social prediction? Journal of Personality and Social Psychology, 79(6), 861-875

60. So, why don’t we do it? I’m always in control. You could choose your environment to protect against damage by the elephant. You could choose your environment to encourage the achievement of your goals. But, you won’t, because you think you won’t need it.

61. Slides by: Russell James III, J.D., Ph.D., CFP® Associate Professor Division of Personal Financial Planning Texas Tech University russell.james@ttu.edu Please use these slides! If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks! The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component