I haven't followed this literature closely, but it looks interesting and many of the papers noted below have been posted here ( 1, 2, and 3, the last has links to seven papers). It's an analysis of savings behavior starting from a biological perspective. On another note, I'm very literally off to grandma's house in a few minutes - lots of rivers to pass over and lots of woods to pass through - so I won't be able to post or comment until tonight:
Impatience and Savings, NBER Reporter: Research Summary Fall 2005, by David Laibson: When making decisions with immediate consequences, economic actors typically display a high degree of impatience. Consumers choose immediate pleasures instead of waiting a few days for much larger rewards. Consumers want "instant gratification." However, people do not behave impatiently when they make decisions for the future. Few people plan to break their diets next week. Instead, people tend to splurge today and vow to exercise/diet/save tomorrow. From today's viewpoint, people prefer to act impatiently right now but to act patiently later.
Data from neuroscience experiments provide a potential explanation for these observations: short-run decisions engage different brain systems from long-run decisions. Using functional magnetic resonance imaging (fMRI), Samuel McClure, George Loewenstein, Jonathan D. Cohen, and I have shown that decisions that involve at least some short-run tradeoffs recruit both analytic and emotional brain systems, whereas decisions that only involve long-run tradeoffs primarily recruit analytic brain systems. These findings suggest that people pursue instant gratification because the emotional brain system - the limbic system - values immediate rewards but only weakly responds to delayed rewards.
Whatever the underlying biological mechanism, the taste for instant gratification can be incorporated into models of human behavior. Several strands of my work have attempted to do this. Chris Harris and I have proposed models in which actors place a special premium on immediate pleasures. I also have developed models that assume that people have biologically conditioned motivational states: when familiar cues are presented, consumers experience a drive to consume the goods that they consumed in the presence of those cues in the past. For example, a cigarette smoker will urgently want a smoke when he enters his favorite bar (where he has smoked before).
The drive for immediate gratification has many empirical consequences that my coauthors and I have studied. Marios Angeletos, Andrea Repetto, Jeremy Tobacman, Stephen Weinberg, and I have run computational simulations of consumers with a taste for instant gratification (specifically, we studied quasi-hyperbolic discount functions). We find that such consumers quickly spend whatever liquid wealth they have and are only able to save in illiquid assets. These consumers live from hand to mouth in their checking accounts, but hold large stocks of illiquid assets like home equity and defined contribution pension plans. When making long-run choices - for example, when deciding how to invest during flush times - these consumers buy illiquid assets that offer a high rate of return and pay out slowly over many decades. When making short-run decisions, however, these consumers are willing to pay a high price for immediate gratification.
Repetto, Tobacman, and I show that the taste for instant gratification explains why households hold illiquid assets and also frequently borrow with credit cards that involve relatively high interest rates. We also estimate the strength of the taste for immediate gratification. We find that consumers have a short-run discount rate of 30 percent and a long-run discount rate of 5 percent. In other words, delaying a reward by a year reduces its value by 30 percent, but delaying the same reward an additional year only generates an additional 5 percent devaluation.
Consumers with a taste for immediate gratification will avoid immediate disutility. Such consumers will repeatedly delay finishing unpleasant tasks like enrolling in a 401(k) plan. James J. Choi, Brigitte Madrian, Andrew Metrick, and I have found signs of procrastination in a survey of employees. Over two thirds of respondents say that they save too little, and none say that they save too much. Among the self-reported undersavers, over one third say that they plan to join the 401(k) plan or raise their savings rate in the next two months. Using administrative records, we find that almost none follow through in the next four months.
It is typically difficult to determine whether households save optimally. Even asking a respondent - as we did above - yields ambiguous evidence, since it is not clear what it means to say, "I save too little." But in some cases, savings incentives are strong enough to make very sharp predictions about optimal 401(k) contribution rates. Choi, Madrian and I have analyzed employees who receive employer-matching contributions in their 401(k) plan and are allowed to make discretionary, penalty-free, in-service withdrawals. For these employees, contributing below the match threshold is an unambiguous mistake. Nevertheless, half of employees with such clear-cut incentives do contribute below the match threshold, foregoing match payments that average 1.3 percent of their annual pay. In our sample, making this mistake correlates with other types of procrastination. Finally, providing these "undersavers" with specific information about the free lunch they are foregoing fails to raise contribution rates.
Such savings problems suggest that economists should think about the effectiveness of existing savings institutions. In particular, economists should ask why new employees take so long to enroll in 401(k) plans. Madrian and Dennis Shea started this literature by showing that defaults play a critical role. Their original paper shows that the typical employee sticks with the default option - whether the default is enrollment or non-enrollment - for years after joining a new firm. Follow up papers have replicated these findings in a large number of firms. ... Evidence on company stock also supports the conclusion that savers are remarkably passive. In 401(k) plans with the option to invest in company stock, nearly half of the assets are invested in company stock. ... The high allocation to company stock is linked to the fact that many employer-matching contributions are automatically invested in company stock. These matched contributions stay in employer stock, even when employees have the option to reallocate the money. In contrast, when an employer asks its employees to choose their own portfolio allocation, employees invest a much lower share in company stock.
Asking employees to make their own decisions - by discouraging reliance on a default action or removing the default altogether - also provides a good system for 401(k) enrollment. ... The power of defaults implies that policymakers and 401(k) plan designers should pick defaults very carefully, even though they are non-binding. ... My collaborators and I continue to study the foundations of instant gratification, the consequences for savings behavior, and the implications for the design of optimal savings institutions.
1. S. McClure, D. Laibson, G. Loewenstein, and J. D. Cohen, "Separate Neural Systems Value Immediate and Delayed Monetary Rewards," Science 306 (October 15, 2004), pp. 503-7.
2. D. Laibson, "Golden Eggs and Hyperbolic Discounting," Quarterly Journal of Economics, 62 (May 1997), pp. 443-77; C. J. Harris and D. Laibson, "Instantaneous Gratification," Harvard mimeo (2005); C.J. Harris and D. Laibson, "Hyperbolic Discounting and Consumption," in M. Dewatripont, L. P. Hansen, and S. Turnovsky, eds., Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume 1 (2002), pp. 258-98; and C. J. Harris, and D. Laibson, "Dynamic Choices of Hyperbolic Consumers," Econometrica, 69(4) (July 2001), pp. 935-57.
3. D. Laibson, "A Cue-Theory of Consumption," Quarterly Journal of Economics, 66(1) (February 2001), pp. 81-120.
4. G. Angeletos, D. Laibson, A. Repetto, J. Tobacman, and S. Weinberg, "The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation" Journal of Economic Perspectives (August 2001), pp. 47-68.
5. D. Laibson, A. Repetto and J. Tobacman, "A Debt Puzzle," in P. Aghion, R. Frydman, J. Stiglitz, M. Woodford, eds., Knowledge, Information and Expectations in Modern Economics: In Honor of Edmund S. Phelps, Princeton: Princeton University Press (2003), pp. 228-66.
6. D. Laibson, A. Repetto and J. Tobacman, "Estimating Discount Functions with Consumption Choices over the Lifecycle," NBER Working Paper, forthcoming.
7. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance" in J. M. Poterba, ed., Tax Policy and the Economy, 16 (2002), pp. 67-113.
8. J. J. Choi, D. Laibson, and B. Madrian, "$100 Bills on the Sidewalk: Failing to Save Optimally in 401(k) Plans," NBER Working Paper No. 11554, August 2005.
9. B. Madrian and D. Shea, "The Power of Suggestion: Intertia in 401(k) Participation and Savings Behavior," Quarterly Journal of Economics Vol. 116 (4) (2001), pp. 1149-87.
10. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance," in E. McCaffrey and J. Slemrod, eds., Behavioral Public Finance, 2005; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Plan Design and 401(k) Savings Outcomes," National Tax Journal, 57(2) (June 2004), pp. 275-98; J. Choi, D. Laibson, B. Madrian, and A. Metrick, "For Better or For Worse: Default Effects and 401(k) Savings Behavior" in D. Wise, ed., Perspectives in the Economics of Aging, Chicago, IL: University of Chicago Press (2004), pp. 81-121; and J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance."
11. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance"; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance"; J. Choi, D. Laibson, and B. Madrian, "Are Empowerment and Education Enough? Under-Diversification in 401(k) Plans," NBER Working Paper, forthcoming.
12. J. J. Choi, D. Laibson, and B. Madrian, "Are Empowerment and Education Enough? Under-Diversification in 401(k) Plans."
13. J.J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Active Decisions," NBER Working Paper No. 11074, January 2005.
14. See Cronqvist and Thaler, "Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience," American Economic Review, 94(2) (May 2004), pp. 424-28.
15. J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Saving for Retirement on the Path of Least Resistance"; J.J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Active Decisions"; J. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Optimal Defaults," American Economic Review Papers and Proceedings (May 2003), pp. 180-185.