Goal Setting as a Self-Regulation Mechanism
AbstractWe develop a theory of self-regulation based on goal setting for an agent with present-biased preferences. Preferences are assumed to be reference-dependent and exhibit loss aversion, as in prospect theory. The reference point is determined endogenously as an optimal self-sustaining goal. The interaction between hyperbolic discounting and loss aversion makes goals a credible and effective instrument for self-regulation. This is an entirely internal commitment device that does not rely on reputation building. We show that in some cases it is optimal to engage in indulgent behavior, and sometimes it is optimal to set seemingly dysfunctional goals. Finally, we derive a condition under which proximal (short term) goals are better than distal (long term) goals. Our results provide an implicit evolutionary rationale for the existence of loss aversion as a means of self-control.
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Bibliographic InfoPaper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0122.
Length: 31 pages
Date of creation: Oct 2008
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self-regulation; goals; time inconsistency; loss aversion; indulgence; compulsiveness; proximal and distal;
Find related papers by JEL classification:
- D00 - Microeconomics - - General - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D90 - Microeconomics - - Intertemporal Choice - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-13 (All new papers)
- NEP-CBE-2008-10-13 (Cognitive & Behavioural Economics)
- NEP-UPT-2008-10-13 (Utility Models & Prospect Theory)
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