9483
AiS

Session 9a

Joshua
Foster



Agenda

  1. Case: Selling CFLs at Wal-Mart.

"The pleasure which we are to enjoy ten years hence, interests us so little in comparison with that which we may enjoy today..."
- Adam Smith, The Theory of Moral Sentiments

What is the problem Barron at Wal-Mart is working on?

What are the costs/benefits of using CFLs?

Advantages of CFLsDisadvantages of CFLs
1)1)
2)2)
3)3)

What would the rational economist do in their house?

Economics from the case.

Why is adoption so low at this time?

How many light sockets are in your house/apartment?

How much was your last electric bill?

Moral Hazard among renters/roommates.

An (incomplete) contract isn't able to align individual actions with their costs. This is a classic problem in economics.

Survey question insights.

Suppose I could give you:
  • 100 in cash in right now, or
  • X in cash in two weeks.
What is the smallest amount of money, X, I could offer you in two weeks to make you forgo the 100 in right now?		Suppose I could give you:
  • 100 in cash in eight weeks, or
  • X in cash in ten weeks.
What is the smallest amount of money, X, I could offer you in ten weeks to make you forgo the 100 in eight weeks?
$\bar{X}=134.82$$\bar{X}=113.00$
"With no expectations of earning exorbitant returns in two weeks I don't have reasonable NPV estimate but I would say $110."-someone

Dynamic Consistency: a truly magnificent property.

The action a person thinks they should take in the future always coincides with the action that they actually prefer once the time comes.

Examples:

  • If today we wish ourselves to work on a problem set tomorrow, then tomorrow we prefer to work on the problem set immediately.
  • If today we prefer to quit smoking tomorrow, then tomorrow we prefer to quit smoking immediately.
  • If today we prefer to diet tomorrow, tomorrow we will want to diet immediately.

Present Bias: in actuality, people have a strong tendency to over-value immediate gratification, relative to their own long-term preferences.

  • If so, then dynamic consistency no longer holds.

Back to economics from the case.

What would a behavioural economist at Wal-Mart do to "nudge" CFL adoption?

How do third parties (govt./utilities) play a role here?

What would a behavioural economist at a third party do to "nudge" CFL adoption?

Key Takeaways.

Intertemporal choice problems can lead to:

  1. Dynamic inconsistency: making choices that do not align with one's own long-run preferences.
    • A consequence of Present Bias.
    • Leads to adverse market outcomes.