A review of economic and behavioral economic approaches to excessive future discounting and addiction decisions

1. Dr. Russell James III, Texas Tech University Why train the elephant? The problem of excessive future discounting and addictions

2. Elephant in charge If given total control, the “elephant” side makes choices detrimental to future success and happiness. Long-term Patient Planner Impartial spectator Deliberative Cold state Short-term Impulsive Doer Passions Affective/Visceral Hot state

3. Problems with an untrained elephant… Decisions dominated by the short-term, impulsive self tend to reduce future happiness and success due to: Excessive future discounting Finding negative addictions Avoiding positive addictions

4. Problems with excessive future discounting Future discounting The rate at which you are willing to trade immediate experience for future experience.

5. In the future, I’m paying 14% interest on an asset with disappearing value. Today, I can drive away in a new car with nothing down!

6. Excessive future discounting The rate at which we are willing to trade current experience for future experience reflects our rate of future discounting. In the future, I will pay $150 in accumulated interest/penalties Today I can spend $100 borrowed on my credit card

7. Future discounting If you were in a mall and wanted to buy something, how much would you be willing to pay for $100 right now? Next month $95 owed. A Next month $99 owed. Today $100 borrowed B Next month $100 owed. C Next month $101 owed. D Next month $102 owed. E Where will you change from saying “yes” to the saying “no”? Next month $105 owed.

8. Future discounting in other areas Decisions by the elephant tend ignore future consequences. Short-term Impulsive Doer Passions Affective/ Visceral Hot state

9. Future discounting in eating Healthy? Unhealthy? Moderate? Excessive?

10. Future discounting in drinking None? Moderate? Excess?

11. Future discounting in education Graduate? Drop out?

12. Future discounting in sex Abstain? Monogamy? Serial monogamy? Risky?

13. Future discounting in exercise None? Rare? Regular?

14. Excessive future discounting The elephant-side may make “fun” choices, but you could end up broke, obese, ignorant, hung over, diseased, and dying! Short-term Impulsive Doer Passions Affective/Visceral Hot state

15. Future discounting and success in children “Those 4-year-old children who delayed gratification longer in certain laboratory situations developed into more cognitively and socially competent adolescents, achieving higher scholastic performance and coping better with frustration and stress.” http://www.youtube.com/watch?v=M0yhHKWUa0g Mischel, W. (Columbia), Shoda, Y. (Columbia), Rodriguez, M. (Columbia), 1989, Delay of gratification in children. Science, 244, 933-938.

16. Time horizon and wealth building In 1998 about 5,000 people were asked: “In planning your saving and spending, which of the following time periods is most important to you, the next few months, the next year, the next few years, the next 5-10 years, or longer than 10 years?” Comparing people with the same starting wealth, did those with longer time horizons accumulate more wealth in the following 8 years?

17. Wealth growth and time horizon Comparing with the wealth growth of other people with the same starting wealth:

18. Other research finds:Planning ahead->wealth “Why do similar households end up with very different levels of wealth?” “We use new and unique survey data to assess these differences and to measure each household’s ‘propensity to plan.’ We show that those with a higher such propensity spend more time developing financial plans, and that this shift in planning is associated with increased wealth.” Ameriks, J., Caplin, A. (NYU), Leahy, J. (NYU). 2003. Wealth accumulation and the propensity to plan. Quarterly Journal of Economics, 118(3), 1007-1047.

19. Problems with an untrained elephant… Decisions dominated by the short-term, impulsive self tend to reduce future happiness and success due to: Excessive future discounting Finding negative addictions Avoiding positive addictions

20. Finding negative addictions The elephant is experiential. Consequently, the elephant side craves experiential variety. Short-term Impulsive Doer Passions Affective/Visceral Hot state

21. Variety enhances experiential utility Variety is important because “diminishing marginal utility” changes preferences. When enjoyment drops, we switch to another choice.

22. But, unlimited experimentation is risky due to negative addiction “traps” Addiction alters the ability of the rider to control future choices. The elephant gradually loses ability to experience other types of enjoyment, and focuses exclusively on the addiction. The rider “knows” that meth generates a high (and has terrible future consequences). Although the elephant doesn’t care about the future, it hasn’t experienced the effects, so it isn’t tempted.

24. gradually requires more consumption to reach the same level of satisfaction

25. lowers satisfaction from other items (Anhedonia)

27. The negative addiction trap How does a negative addiction affect Future Choices? Future Satisfaction? The Future Brain? Work in groups of 2-5 people. After the video, discuss and have one person write down your thoughts Addiction.wmv http://www.hbo.com/addiction/thefilm/centerpiece/616_segment_5.html

28. “Rationality” inside a negative addiction “[previous research shows] people who discount the future heavily are more likely to become addicted. Our result establishes the converse, that harmful addictions induce even rational persons to discount the future more heavily, which may in turn lead them to become more addicted.” Becker, G. (Chicago) & Mulligan, C. (Chicago) , 1997, The endogenous determination of time preference.Quarterly Journal of Economics, 113, p.744

29. “Rationality” inside a negative addiction We could work through the mathematics of the model from Nobel prize winning economist Gary Becker… but, instead, let’s try… Becker, G. (Chicago) & Mulligan, C. (Chicago) , 1997, The endogenous determination of time preference.Quarterly Journal of Economics, 113, p.744

30. Translating Gary Becker using Jeff Spicoli Look, it’s not like he is giving up a future career as a brain surgeon or something. Even if he could have done that at one point in his life, that is no longer an option due to the effects of addiction. So he isn’t giving up that much more by continuing to diminish his (already limited) future prospects.

31. Rationality inside a negative addiction The initial meth user may be giving up a lot of future opportunities for using. After continued use, she may not be giving up as many future opportunities to keep using.

32. Path dependent preference: negative addiction A low concern for the future addictive consumption (diminishes future options) Diminished future options means additional loss from further consumption is less Non addictive consumption ↓ reward Anhedonia↑

33. Applying concepts to practice An Interview with Kathleen T. Brady, M.D., Ph.D., Professor and Director of the Clinical Neuroscience Division at the Medical University of South Carolina. Anhedonia and early intervention http://www.hbo.com/addiction/thefilm/supplemental/621_kathleen_brady.html From start of “How Does Addiction Affect the Brain?” until just before start of “What aspects of a person’s life need to be addressed in recovery?” (Ending segment of chapter 1 on the website)

34. Negative addictions and the paradox of consumption variety Unlimited consumption experimenting risks negative addiction. Negative addiction leads to exclusive focus on the addictive item. Unlimited consumption variety for immediate experience Extreme focus on addiction with poor life experiences Negative addiction

35. Problems with an untrained elephant… Decisions dominated by the short-term, impulsive self, tend to reduce future happiness and success due to: Excessive future discounting Finding negative addictions Avoiding positive addictions

37. gradually becomes more enjoyable with experience

39. Potential positive addictions Education in a particular field of study Exercise Religious practice Reading complex novels or non-fiction Watching opera, ballet, football, equestrian, basketball Playing a musical instrument or a sport

40. Consumption capital and positive addictions Experience leads to greater understanding, appreciation, and enjoyment. This accumulated experience resulting in greater enjoyment is called “consumption capital” Sing, o muse of the pernicious anger of Achilles…

41. Path dependent preference: positive addictions Low current utility but with future benefits Practice increases enjoyment of future consumption Increased current utility leads to more practice Consumption Capital ↑ External Benefits ↑

43. Positive addictions

44. Increasing focus on long-term behaviors

48. 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