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Optimal Time-Inconsistent Beliefs: Misplanning, Procrastination, and Commitment

Author

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  • Markus K. Brunnermeier

    (Department of Economics, Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08544; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Filippos Papakonstantinou

    (Imperial College London, South Kensington Campus, London SW7 2AZ, United Kingdom)

  • Jonathan A. Parker

    (MIT Sloan School of Management, Cambridge, Massachusetts 02142; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

We develop a structural theory of beliefs and behavior that relaxes the assumption of time consistency in beliefs . Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are that (i) optimal beliefs are optimistic and time inconsistent; (ii) people optimally exhibit the planning fallacy; (iii) incentives for rapid task completion make beliefs more optimistic and worsen work smoothing, whereas incentives for accurate duration prediction make beliefs less optimistic and improve work smoothing; (iv) without a commitment device, beliefs become less optimistic over time; and (v) in the presence of a commitment device, beliefs may become more optimistic over time, and people optimally exhibit preference for commitment.

Suggested Citation

  • Markus K. Brunnermeier & Filippos Papakonstantinou & Jonathan A. Parker, 2017. "Optimal Time-Inconsistent Beliefs: Misplanning, Procrastination, and Commitment," Management Science, INFORMS, vol. 63(5), pages 1318-1340, May.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1318-1340
    DOI: 10.1287/mnsc.2015.2360
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    References listed on IDEAS

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    Cited by:

    1. Tommi Ekholm & Erin Baker, 2022. "Multiple Beliefs, Dominance and Dynamic Consistency," Management Science, INFORMS, vol. 68(1), pages 529-540, January.
    2. Victor Augias & Daniel M. A. Barreto, 2020. "Persuading a Wishful Thinker," Papers 2011.13846, arXiv.org, revised Nov 2023.
    3. Kyle Hyndman & Alberto Bisin, 2022. "Procrastination, self-imposed deadlines and other commitment devices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(3), pages 871-897, October.
    4. Li, Jiangyuan & Liu, Bo & Yang, Jinqiang & Zou, Zhentao, 2020. "Hedge fund’s dynamic leverage decisions under time-inconsistent preferences," European Journal of Operational Research, Elsevier, vol. 284(2), pages 779-791.
    5. J. Michael Collins & Amrita Kulka, 2023. "Saving by buying ahead: stockpiling in response to lump‐sum payments," Fiscal Studies, John Wiley & Sons, vol. 44(4), pages 451-484, December.
    6. Charlotte Cordes & Jana Friedrichsen & Simeon Schudy, 2023. "Motivated Procrastination," Rationality and Competition Discussion Paper Series 471, CRC TRR 190 Rationality and Competition.

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