In the previous section, I explained the important function of illiquid assets as a commitment device and the implications thereof. Now, the notion that consumers use “the goose that lays the golden eggs,” namely, illiquid assets, as a commitment device is based on the assumption that they are sophisticated decision-makers—
individuals who acknowledge their own self-control problems under hyperbolic discounting.
However, are people sophisticated decision-makers in the first place? This is an important point when they consider their own actions, as well as when policy- makers consider policy measures. If they are already sophisticated decision-makers, an effective policy measure would be to improve choices by providing commitment devices in various forms, as explained in the previous section. If people are naı¨ve decision-makers, guiding or restricting choices and actions through policy instru- ments would be an important policy challenge in some cases, in addition to providing education on how to improve their decision-making.
4.7.1 Partially Naı¨ve
Although we definitely need to await the results of empirical studies for an exact answer as to whether people are sophisticated or not, it is quite certain that the answer will not be a simple “yes” or “no.” It seems that people are often aware of the unreliability of the future self and try to become sophisticated decision-makers, even though they do not know of concepts such as hyperbolic discounting and preference reversal. The fact that various commitment devices—like the ones described in the previous section—are being used lends evidence for this. As we see with the old term akrasia (acting against one’s better judgment) in Greek philosophy, self-control and internal conflict in the future are issues that we as humans have been aware of and about which we have fretted since ancient times; it is also the theme of much art. These facts imply that we have been aware of our own propensity to indulge in immediate pleasures that hurt our long-term interests.
One of the important points is that such awareness still seems insufficient in many cases. When you are aware of your self-control problems that stem from hyperbolic discounting and nonetheless underestimate your own degree of hyper- bolic discounting, some unexpected preference reversals will occur over time;
accordingly, as in the case of naı¨ve decision-making, unplanned procrastination and schedule acceleration will take place. Such decision-makers who are somewhat unable to anticipate their own weakness are referred to as “partially naı¨ve”
decision-makers (O’Donoghue and Rabin 2001). What I would like to point out here is that most of us probably fall under the category of partially naı¨ve decision- makers.
The findings of the 2010 online survey introduced in Table3.1of the previous chapter also indicate that naı¨ve decision-makers who end up finishing their home- work assignments later than the original plan accounted for 60 % of all respondents with the hyperbolic tendency. When the sample is limited to the respondents who have the tendency to procrastinate and completed the homework assignments in the second half of the vacation, as many as 88.7 % were naı¨ve decision-makers who had scrapped their original plan. Granted that they were not completely unaware of their
own self-control issues, it is probably reasonable to think that many of them were partially naı¨ve decision-makers who somewhat underestimated preference reversal in the future.
It is difficult to regard all failed behaviors and choices—undersaving, multiple debts, obesity and other lifestyle-related diseases, various dependencies, impro- vised excuses and lies, repeated crimes, and so on—as the outcomes of sophisti- cated choices to act without contradiction, by taking into account just the right amount of one’s own weakness. The fact that failed choices are often accompanied by unexpected changes in a plan, or excuses that rationalize those changes, speaks for itself.
4.7.2 Deadlines and Efficiency
Famous field experiments conducted by Dan Ariely and Klaus Wertenbroch at the Massachusetts Institute of Technology suggest that people’s behavior across time is actually not very sophisticated (Ariely and Wertenbroch 2002). Ariely and Wertenbroch conducted the following experiments among students within a class to assess their level of understanding of and their capability of dealing with their own self-control problems.
The students are told on the first day of class that they need to turn in three reports over the course of a 14-week semester. The subjects are randomly divided into two groups with different deadline settings: one is a “no-choice” group (48 students) with three forcibly imposed, evenly spaced deadlines; the other is a
“free-choice” group (51 students) in which students are allowed to choose and report their own deadlines before the second day of class. In both groups, the score of any student who misses a deadline is reduced by one percentage point per day.
Although they are told that the final deadline is the last day of the 14-week period, the students in the “free-choice” group are allowed to choose the other two deadlines in any way they like. They can push those two deadlines to the final deadline to virtually eliminate extra deadlines. They can also set evenly spaced deadlines, just like those seen in the other group. In other words, being in the “free- choice” group allows the students therein to freely take into account the laziness of their own future selves and determine whether to set deadlines during the semester and, if so, at what intervals to set the deadlines.
So, what were the results? First, as many as 73 % of the students in the “free- choice” group chose deadlines during the semester that were other than the last day, indicating that the students were well aware of their own self-control problems. On the other hand, the average performance score among students in the “free-choice”
group was 85.67, compared to 88.76 among students in the “no-choice” group, showing that performance was lower among the students who had freely decided their own deadlines. If the students were making rational choices by fully taking into account self-control problems, the “free-choice” group with more freedom of
choice should have recorded better scores. We can construe that it did not work that way because the students were not fully aware of their own self-control problems and were somewhat naı¨ve planners, and so ultimately, the choices were not optimal, as expected. The fact that the performance of the “free-choice” group students who voluntarily set even-spaced deadlines was not very different from that of the students in the “no-choice” group also supports the above reasoning.
To explore the benefit of setting one’s own deadlines, Ariely and Wertenbroch conducted a second study, which they termed “Study 2.” Here, subjects in three groups, each with different deadline settings, are asked to proofread for money.
There are three jobs, and the subjects in the first group are told to submit jobs one by one on the deadline that comes every 7 days (i.e., the “evenly spaced deadlines”
group). The subjects in the second group choose three deadlines during the 21-day period based on their own preference (i.e., the “self-imposed deadlines” group), while the last day was set as the unique deadline for the subjects in the last group (i.e., the “end-deadline” group). The results were quite straightforward: the job performance was the highest among the subjects in the “evenly spaced deadlines”
group, followed by the “self-imposed deadlines” group and the “end-deadline”
group, in terms of both quality and quantity. The new point demonstrated in Study 2 is that job efficiency improves when one can self-impose deadlines compared to when there are no in-between deadlines at all. The subjects in the
“end-deadline” group could have chosen to personally set deadlines if they were aware of their own self-control problems; however, the above results suggest that such informal self-management does not work very well in disciplining oneself.
4.7.3 When to Start Studying for an Examination
The results of the experiments of Ariely and Wertenbroch strongly suggest the possibility that people often make a choice that ends up hurting their long-term benefits, because although they are sophisticated enough to take the weak future self into account, that is still not enough. However, their experiments cannot uncover what percentage of people are actually aware of their own self-control problems and what percentage of people are partially naı¨ve decision-makers to some extent.
Wei-Kang Wong (2008) at the National University of Singapore conducted a field experiment involving 445 students enrolled in his introductory macroeconom- ics class by asking when they begin preparing for the midterm examination; he demonstrated that a quite high percentage of these people are only partially aware of having self-control problems. Wong asked about the ideal, predicted, and actual dates to start preparing for the midterm examination by posing the following questions.
Q1 (Ideal date to start): What is theoptimal or ideal datefor you to start preparing for the midterm?
Q2 (Predicted date to start): Knowing yourself, what is thepredicted dateyou think you would start preparing for the midterm, whatever the ideal date may be?
Q3 (Actual date to start): What was theactual dateyou started preparing for the midterm?
Q1 and Q2 are asked 3 weeks before the midterm begins; Q3 is asked on the day of the midterm, just prior to the examination.
What is interesting with this study is that we can compare the responses to these three questions and determine whether a subject has self-control problems (time inconsistency) and assess his or her level of naivety. First, by taking the responses to Q1 and Q3 and comparing the ideal and actual starting dates, we can check whether there are self-control problems: students who could not start preparing for the examination on or before the ideal date are assessed as having self-control problems; otherwise, students are regarded as exponential decision-makers who are not troubled by such problems.
For those students who were assessed as having self-control problems, we can estimate how well they were able to follow the prediction (plan) to start preparing for the examination in reality by using the responses to Q2 and Q3 and identifying whether the subject is naı¨ve or sophisticated.
Next, by comparing the ideal (the response to Q1) and the predicted (the response to Q2) among the students who were identified as naı¨ve, we can determine howunwarethey are of their own self-control problems or how naı¨ve they are. The students who predicted that they were able to start preparing on the ideal date as planned are identified as naı¨ve decision-makers who are completely unaware of their own self-control problems, while those who somewhat predicted that things would not follow the ideal are identified as partially naı¨ve decision-makers.
Wong’s results are summarized in Table 4.3. First, it shows that a majority (93.8 %) of the subjects have self-control problems.
Second, as we have discussed thus far, most (86.8 %) of the subjects with self- control problems are partially or completely naı¨ve, whereas only 13 % of the subjects are completely sophisticated.
Wong further indicated that the students identified as having self-control prob- lems performed better in class compared to other students. Moreover, they were likely to overestimate the performance level they could achieve.
Based on the results of the above field experiments, we can derive the following implications. People as humans have the wisdom to realize their own self-control problems and use commitment devices on themselves. While it is true that this wisdom improves work outcomes and the efficiency of choices, relying solely on the use of commitment devices is insufficient because the awareness of self-control problems is imperfect and there is much room for improving choices and behavior.
In terms of policy measures, it will be necessary to provide institutionalized commitment devices on the premise of sophisticated decision-making while pro- viding education and intervention on the premise of naı¨ve or at least partially naı¨ve decision-making. I will discuss this point in greater detail in Chap.6.