Closing the Eyes on a Gloomy Future: Psychological Causes and Economic Consequences
This paper analyzes the impact of economic prospects on one’s time preference. Research in psychol- ogy has shown how individuals modify their preferences in order to reduce their cognitive dissonance, which is the uncomfortable tension felt when simultaneously holding conflicting thoughts. It occurs among the poor when simultaneously caring about their future welfare while having gloomy economic prospects. Hence closing their eyes on the future can reduce their psychological distress at the cost of worsening their future economic wellbeing. This paper offers a new theoretical approach that decom- poses time discounting and analyzes the endogenous determination of one’s time horizon. The model predicts that, below a certain wealth, the time horizon of an individual is decreasing in poverty, result- ing in a behavioral poverty trap. The prediction is tested using data from a randomized experiment in Mozambique, which confirms that the beneficiaries of an agro-input subsidy and a matched savings intervention increased their planning horizon as a result of their improved economic prospects.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202|
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gary S. Becker & Casey B. Mulligan, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 729-758.
- Nava Ashraf & Dean S. Karlan & Wesley Yin, 2005. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," Working Papers 917, Economic Growth Center, Yale University.
- 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.
- Fudenberg, Drew & Levine, David, 2006. "A Dual-Self Model of Impulse Control," Scholarly Articles 3196335, Harvard University Department of Economics.
- Drew Fudenberg & David K Levine, 2005. "A Dual Self Model of Impulse Control," Levine's Working Paper Archive 618897000000000876, David K. Levine.
- Drew Fudenberg & David K. Levine, 2006. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2112, Harvard - Institute of Economic Research.
- Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
- Matthew Rabin & Ted O'Donoghue, 1999.
"Doing It Now or Later,"
American Economic Review,
American Economic Association, vol. 89(1), pages 103-124, March.
- O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
- Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
- Banerjee, Abhijit & Duflo, Esther, 2006.
"The Economic Lives of the Poor,"
CEPR Discussion Papers
5968, C.E.P.R. Discussion Papers.
- Abhijit Banerjee & Sendhil Mullainathan, 2010.
"The Shape of Temptation: Implications for the Economic Lives of the Poor,"
- Banerjee, Abhijit & Mullainathan, Sendhil, 2010. "The Shape of Temptation: Implications for the Economic Lives of the Poor," CEPR Discussion Papers 7828, C.E.P.R. Discussion Papers.
- Abhijit Banerjee & Sendhil Mullainathan, 2010. "The Shape of Temptation: Implications for the Economic Lives of the Poor," NBER Working Papers 15973, National Bureau of Economic Research, Inc.
- H. M. Shefrin & Richard Thaler, 1977.
"An Economic Theory of Self-Control,"
NBER Working Papers
0208, National Bureau of Economic Research, Inc.
- R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
- John Ameriks & Andrew Caplin & John Leahy, 2003. "Wealth Accumulation and the Propensity to Plan," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 1007-1047.
- Deepa Narayan & Robert Chambers & Meera K. Shah & Patti Petesch, 2000. "Voices of the Poor : Crying Out for Change," World Bank Publications, The World Bank, number 13848, August.
- Jamison, Julian & Wegener, Jon, 2010. "Multiple selves in intertemporal choice," Journal of Economic Psychology, Elsevier, vol. 31(5), pages 832-839, October.
- David Laibson, 1997.
"Golden Eggs and Hyperbolic Discounting,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(2), pages 443-478.
- Brune, Lasse & Gine, Xavier & Goldberg, Jessica & Yang, Dean, 2011. "Commitments to save : a field experiment in rural Malawi," Policy Research Working Paper Series 5748, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:ags:aaea12:123933. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.