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Risk, Delay, and Convex Self-Control Costs

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  • Drew Fudenberg
  • David K Levine

Abstract

We develop a dual-self model of self-control that is compatible with modern dynamic macroeconomic theory and evidence. We show that a convex cost of self-control explains a wide range of behavioral anomalies concerning risk, including the Allais paradox, and also explains the observed interaction between risk and delay. We calibrate the model to obtain a quantitative fit. We find that most of the data can be explained with subjective interest rates in the range of 1-7 percent, short-run relative risk aversion of about two, and a time horizon of one day for the short-run self. (JEL D11, D44, D81)

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Bibliographic Info

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 843644000000000332.

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Date of creation: 14 Oct 2009
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Handle: RePEc:cla:levarc:843644000000000332

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Web page: http://www.dklevine.com/

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References

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  1. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
  2. Drew Fudenberg & David K. Levine, 2004. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2049, Harvard - Institute of Economic Research.
  3. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
  4. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2010. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," Econometrica, Econometric Society, vol. 78(4), pages 1375-1412, 07.
  5. Loewenstein, George & O'Donoghue, Ted, 2004. "Animal Spirits: Affective and Deliberative Processes in Economic Behavior," Working Papers 04-14, Cornell University, Center for Analytic Economics.
  6. Isabelle Brocas & Juan D. Carrillo, 2005. "The Brain as a Hierarchical Organization," Levine's Bibliography 172782000000000073, UCLA Department of Economics.
  7. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 831-877, 05.
  8. Brocas, Isabelle & Carrillo, Juan D, 2005. "The Brain as a Hierarchical Organization," CEPR Discussion Papers 5168, C.E.P.R. Discussion Papers.
  9. Manel Baucells & Franz Heukamp, 2010. "Common ratio using delay," Theory and Decision, Springer, vol. 68(1), pages 149-158, February.
  10. Postlewaite,A. & Samuelson,L. & Silverman,D., 2004. "Consumption commitments and preferences for risk," Working papers 15, Wisconsin Madison - Social Systems.
  11. Benhabib, Jess & Bisin, Alberto, 2005. "Modeling internal commitment mechanisms and self-control: A neuroeconomics approach to consumption-saving decisions," Games and Economic Behavior, Elsevier, vol. 52(2), pages 460-492, August.
  12. Isabelle Brocas & Juan D. Carrillo, 2005. "The Brain as a Hierarchical Organization," Levine's Bibliography 784828000000000205, UCLA Department of Economics.
  13. Shiv, Baba & Fedorikhin, Alexander, 1999. " Heart and Mind in Conflict: The Interplay of Affect and Cognition in Consumer Decision Making," Journal of Consumer Research, University of Chicago Press, vol. 26(3), pages 278-92, December.
  14. B. Douglas Bernheim & Antonio Rangel, 2004. "Addiction and Cue-Triggered Decision Processes," American Economic Review, American Economic Association, vol. 94(5), pages 1558-1590, December.
  15. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  16. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  17. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. " Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
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Citations

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Cited by:
  1. Isabelle Brocas & Juan D Carrillo, 2007. "Reason, Emotion, and Information Processing in the Brain," Levine's Working Paper Archive 122247000000001594, David K. Levine.
  2. Tim Friehe & Hannah Schildberg-Hörisch, 2014. "Crime and Self-Control Revisited: Disentangling the Effect of Self-Control on Risk and Social Preferences," CESifo Working Paper Series 4747, CESifo Group Munich.
  3. Brocas, Isabelle & Carrillo, Juan D, 2007. "Reason, Emotion and Information Processing in the Brain," CEPR Discussion Papers 6535, C.E.P.R. Discussion Papers.
  4. Alexander Groves, 2013. "Identifying What is tempting," Working Papers ECARES 2013-41, ULB -- Universite Libre de Bruxelles.
  5. Drichoutis, Andreas & Nayga, Rodolfo, 2010. "Eliciting risk and time preferences under induced mood states," MPRA Paper 25731, University Library of Munich, Germany.
  6. S. Nageeb Ali, 2009. "Learning Self-Control," Levine's Working Paper Archive 814577000000000384, David K. Levine.

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