The dual self model of consumer decision making

The dual self model of consumer decision making

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  Introduction to thedual-self model of choiceDr. Russell James IIITexas Tech University
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  An alternative modelPreviousdiscussion shows that the rational, utility-maximizing assumption for consumers is not always true.So, now what?Throw it out the door?But, it often makes accurate predictionsA modification from behavioral economics
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  “Our theory proposesthat many sorts of decision problems should be viewed as a game between a sequence of short-run impulsive selves and a long-run patient self.”Drew Fudenburg (Harvard U.) and David K. Levine (Washington U.), 2006, A dual-self model of impulse control. American Economic Review, 96(5), 1449-1476.
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  Fudenberg & Levine(2006)Long-run (patient) selfThis side tries to maximize utility across timeShort-run (impulsive) selvesSequential selves that exist only for a brief time
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  Each cares onlyabout immediate experienceExperiment Time!This is real. One of you will be picked to receive one of the choices you selected.
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  Choice OnePick oneYoucan receive $1.00 (cash) on the second to last day of this class.You can receive $1.05 (cash) on the last day of this class.
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  Choice TwoPick one. One week prior to the last day of class, you can have during class eitherTangerineChocolate BarThe dollar value of both is identical. (Of course, the tangerine is a healthier choice.)
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  It’s now time!Getready, someone is about to get a nice giveaway!
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  Choice ThreePick one. Right now, you can have eitherTangerineChocolate BarThe dollar value of both is identical. (Of course, the tangerine is a healthier choice.)
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  Choice FourPick oneYoucan receive $1.00 (cash) right now.You can receive $1.05 (cash) during the next meeting of this class.
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  Research ResultsRead &van Leeuwen (1998). 200 participants. People who were not hungry, chose the unhealthy snack for delivery in one week 26% of the timeThey chose the unhealthy snack for immediate consumption 70% of the time←Next WeekRight Now -> 26%70%
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  Dual-selfLong-run (patient) selfThisside tries to maximize utility across timeShort-run (impulsive) selvesSequential selves that exist only for a brief time
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  Each cares onlyabout immediate experienceDiscussionShort-run (impulsive) selvesDoes the short-run self care aboutFuture consumption next week?
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  Future health consequences?
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  Immediate consumption choice?←NextWeekRight Now -> 26%70%
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  DiscussionDiscuss with aneighbor and vote in a moment.Does this result fit better with simple rational decision-making or a two-system approach? Simple rational decision makingTwo system “dual-self” decision making (long-run/patient self and short-run/impulsive selves)←Next WeekRight Now -> 26%70%
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  Class vote comparisonHowmany voted for chocolate at the end of the semester?Fall 2009 – 62.7% (n=86)How many voted for chocolate right now?Fall 2009 – 64.8% (n=74)
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  Hyperbolic discountingWould yourather receive $100 right now or $101 in a week? Most people choose $100 right now. But when the choice is between $100 a year from now and $101 in a year and a week from now, most people choose $101 in a year and a week. This is time inconsistent, as both choices involve delaying by one week for $1.Note also that choosing $100 right now implies an interest rate charge of 1% per week or APR of 52%
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  DiscussionShort-run (impulsive) selvesDoesthe short-run self care aboutImmediate money?
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  Two different futuremoney options? Now v. laterLater v. much later
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  Class vote comparisonHowmany voted to take the $1 on the second to last day of the class (instead of $1.05 on the last day)?Fall ‘09: 32.2% (n=87)How many voted to take the $1 right now (instead of $1.05 in the next class meeting)?Fall ‘09: 66.3% (n=86)What is the implied interest rate being charged to those who chose the immediate $1?Next class in 2 days. 5% difference. APR = (365/2) X 5% ≈912%
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  Thoughts to ponderCouldthe willingness of some to ignore a 920% interest rate for immediate reward have implications for consumer use of credit?Could the variations in the healthiness of food choices have implications for consumer food choices?More later…
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  Slides by: RussellJames III, J.D., Ph.D., CFP®Associate Professor Division of Personal Financial Planning Texas Tech [email protected] use these slides! If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks!The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component