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Abstract

Many of the most important choices in people's lives have an inter-temporal dimension, i.e., these choices are associated with a flow of benefits or costs that accrue in the future. In addition, such choices are frequently habit-forming. Yet, little is known about habit-forming inter-temporal choice behavior. This paper reports the results of an inter-temporal choice experiment with habit-formation. Subjects' choices deviate systematically from individually optimal decisions in the direction of over-consumption. This over-consumption is partly driven by loss avoidance, comparable to a real life situation in which addicted people consume addictive substances only in order to overpower withdrawal symptoms. Our results thus reject the theory of rational addiction.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 043.

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Handle: RePEc:zur:iewwpx:043

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Related research

Keywords: Inter-temporal Choice; Habit Formation; Addiction; Irrational Behaviour; Excess Consumption;

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Find related papers by JEL classification:

• C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
• D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
• D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
• I10 - Health, Education, and Welfare - - Health - - - General

References

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1. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
   
   • Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
   • Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
2. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
   
   • Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
3. Fehr, Ernst & Zych, Peter K, 1998. " Do Addicts Behave Rationally?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 643-62, September.
   
   • Ernst Fehr & Peter K. Zych, 2003. "Do Addicts Behave Rationally?," Experimental 0305002, EconWPA.
4. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.

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Cited by:

1. Ernst Fehr & Lorenz Goette, 2000. "How Robust are Nominal Wage Rigidities?," Econometric Society World Congress 2000 Contributed Papers 0071, Econometric Society.

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