Sophisticated people, who are aware of their self-control problem, can ensure their own benefits by “tying the hands” of the future self in advance. For example, in the case of deciding which movie to see with one ticket in the movie problem discussed using Fig.4.3, one can prevent the self in the second week from half-heartedly seeing the second-place movie by exchanging the ticket in advance for a reservation ticket for the grand-prize winning movie in the final (third) week. The same can be said for the cleaning problem, wherein one must designate 1 of 3 days at the end of the year for cleaning; one can preclude the risk of the self on the 30th postponing the cleaning to New Year’s Eve by confirming in advance other appointments for the 31st.
As mentioned in Chap.1, limiting the choices of the future self in advance is called “precommitment,” and the methods and systems that can be used to make precommitments are called “(pre)commitment devices.” When a negotiation game between the present and future selves is in progress under hyperbolic discounting, one can create a good situation by using commitment devices to avoid a “prisoner’s dilemma” type of situation, that is, a situation in which the present and future selves take into account each other’s selfish behavior and wind up making choices that are detrimental to each other. Needless to say, it is none other than the present self who will benefit from precommitment because the present self is the one who controls the flow of resource allocation by using it. The present self will act to maximize its own benefit when a powerful binding commitment device is made available.
However, that does not mean that the future self will always lose out, because decision-making that cannot make use of any commitment device is often merely a product of compromise to which impatient and selfish selves can mutually consent.
When a commitment device is available, the future selves also benefit because they, too, are freed from a potential prisoner’s dilemma type of situation.
We have known for a long time without being taught (or perhapsbecause we were taught) of the wisdom of binding oneself by using various commitment devices while considering the eventuality that the patience of the future self will be weaker. Such precommitment improves the efficiency of choices because when faced with a self-control problem, we can only choose the second best option. We can also say that this is because conflicting selves in different points in time play a non-cooperative game and can make only a half-baked choice to which they all can mutually consent.
This point is considerably different from the thought in traditional economics. If a decision maker could always choose the best rational option and behave accord- ingly—as traditional economics presupposes—a precommitment that restricts his or her choices will have no value because the level of gratification that can be gained by making a choice is higher when choices can be made under fewer constraints. When deciding how to spend one’s monthly salary, one should be
able to plan better by considering the allocation of money to savings and expense accounts each month rather than having a certain fixed amount for savings and then considering how to allocate the remaining amount to expense accounts (e.g., grocery and utility bills).
The field of economics excludes interventions and regulations that inhibit free choices in the first place, as they basically compromise the efficiency of choices and thus the efficiency of resource allocation. However, once the premise that one is able to choose the best option becomes untrue due to self-control problems, such an argument loses its validity. If the decision-maker is sophisticated enough to choose by anticipating future preference reversals, then he or she can improve the choice by voluntarily using an available commitment device.
An economist who noted this point as early as 1956 was Robert H. Strotz, a faculty member at Northwestern University at the time and thirteenth President of the university later. His paper entitled “Myopia and Inconsistency in Dynamic Utility Maximization,” which includes an epigram that quotes a passage fromThe Odyssey, wherein Odysseus ordered his comrades to bind him to the mast during a voyage so as not to run aground lured by the Sirens’ fascinating singing, was published inThe Review of Economic Studies, a journal in which young energetic economists of the time competed to publish important papers (Strotz 1955).
This paper presents a problem which I believe has not heretofore been analysed and provides a theory to explain, under different circumstances, three related phenomena:
(1) spend thriftiness; (2) the deliberate regimenting of one’s future behavior—even at a cost, and (3) thrift.
The paper, which begins with this sentence, is now quoted quite frequently as one of the most influential studies in the field of dynamic decision-making.
Surprisingly, the behavior of using a commitment device to ensure a long-term benefit has also been confirmed in experiments involving pigeons. As we can see from the argument related to the matching law, pigeons also exhibit preference reversal, that is, when presented with a choice between getting a small feed now and getting a large feed later, pigeons choose the delayed large feed when the options are set in the far future but choose the immediately available small feed when the options are in the near future.
A button that enables precommitment is placed before the pigeon that is facing the self-control problem of choosing the immediate small feed or larger future feed.
The button facilitates the making of a precommitment: the pigeon is allowed only to choose the large, delayed feed once it is pecked. George Ainslie, who was a psychology researcher at Harvard University, reported that pigeons indeed pecked the commitment button at a rate of 50–90 % to ensure a larger long-term benefit (Ainslie 1974). Appropriately, he quoted Strotz’s article (Strotz 1955) and stated that the results of the pigeon experiment supported Strotz’s theoretical hypothesis (Ainslie 1974, p. 488).
4.5.2 Illiquid Assets and Education as Commitment Devices
We do not have to be pigeons to understand—or, more precisely, because we are not pigeons—that (pre)commitment is a useful means of coping with self-control problems. In fact, if you look around carefully a little, you will soon find a variety of commitment devices that are commonly used: not opening a credit card account, studying in the library, telling everyone that you have stopped smoking or what your dieting goal is, telling everyone about the university to which you are applying, submitting a marriage registration, attending summer school, buying clothing that fits tightly, participating in a fasting training course, and so on. Although their binding effects vary, these are all what we use as commitment devices to “bind the hands” and prevent impatient behavior that runs counter to the long-term benefit. Conversely, we devise ways by which to avoid committing ourselves as much as possible to behavior that will interfere with a long-term benefit; not stocking up on cigarettes and not buying snacks in bulk are some examples. I will discuss the methods of precommitment separately in Chap.6.
There is also a wide range of commitment devices that address undersaving.
Although the level of precommitment varies, examples such as savings-based insurance that bears a high cancellation fee, time deposits, installment savings, and piggy banks that you must break in order to access the contents are devices that help you save money. In addition, the national pension is an example of an institutionally enforced precommitment to save money. The corporate defined contribution pension plan, or 401(k), in the United States is also an example of institutionalized pension-fund reservation.
What becomes key when considering precommitment that addresses undersaving in this way is the illiquidity nature of the assets. Since the liquidity of assets refers to the ease of selling an asset and converting it to cash—or its
“cashability”—illiquidity refers to the difficulty of converting an asset to cash.
Cash, by definition, has a liquidity of 100 %, but its liquidity is slightly lost in the case of time deposits, because it will cost an individual to cancel and cash them.
Stocks and land are even more illiquid because their liquidation involves various costs (e.g., time, commissions, and uncertainties of selling price). The liquidation of savings-type insurance, installment savings, and 401(k) also incurs a considerable cost in the form of processing fees for early cancellation. As for a piggy bank, the cost of a broken and ruined bank reduces its liquidity. On the other hand, because credit cards are devices by which to increase liquidity, one can try to make assets somewhat illiquid by reducing the available line of credit or not having a credit card at all.
The point is that these forms of asset illiquidity are what enable you to commit to holding assets because you can prevent each “future” self from cashing the assets and using them to overspend, whenever struck under hyperbolic discounting by the urge to spend. Time deposits, installment savings, a national pension, and piggy banks are all types of assets held in low-liquidity forms. Land and stocks are also effective commitment devices from the perspective of illiquidity.
Human capital may be the most illiquid asset of all. Once skills and knowledge gained through experience, training, and education are formed, they cannot be taken away, nor can the accumulated knowledge ever be reverted to zero. When parents educate their children instead of leaving “fertile field” properties, this can be considered a type of commitment device that keeps children from reducing future assets by overspending, thus preserving the assets (see Supplement C below).
At the same time, however, it should be noted that the economic principle remains true, that flexibility in decision-making can increase the level of gratifica- tion one can attain. Because tying one’s own hands involves the risk of not being able to respond to unexpected environmental changes, there are two sides to using a commitment device: the benefit of ensuring the long-term benefit by restraining the future selves and the cost of limiting the ability to handle unexpected situations. A procedure by which to compare these advantages and disadvantages then becomes necessary when considering the use of a precommitment device.