While trying to get started on this post, I had facebook open in a different tab. I figured a quick look at what my friends were up to couldn't hurt, so I clicked over to facebook. Once there, I saw that someone had posted this link to a video of Christopher Walken answering the census.
Read the full post to see why I was watching Christopher Walken videos instead of writing this post...
Then I watched Christopher Walken perform Pokerface by Lady Gaga:
I highly recommend these to anyone writing a term paper, working on a project, or trying to accomplish something productive. But, after spending twenty minutes watching Christopher Walken, I have to ask myself: Why did I do it? People all over the world put off dieting, exercise, studying, and saving in favor of eating and watching Christopher Walken videos, and we end up being unfit, failing tests, and running out of money. Why? Behavioral economics can help explain this.
It all has to do with how we "discount" the future. Suppose I offer to give you $50 today, or $50 tomorrow. Since people value the present higher than the future, you would probably take the money today. Now if I offer you $50 today, or $51 tomorrow, which would you take? If you're like most people, you want the money RIGHT NOW and can't wait until tomorrow. Certain parts of the human brain are activated when immediate rewards happen, and it seems we are wired to irrationally want things when we can have them RIGHT NOW.
Now suppose I offer you $50 in a year, or $51 in a year and one day. Now all of a sudden you're thinking about it rationally. "I'm already waiting a year, what's one more day?", you tell yourself. "If I can just hold out one day longer I'll get an extra buck." Since the extra day is in the future, it doesn't seem to matter so much. (The immediate rewards center of your brain is not activated!) So, tomorrow we plan to study, exercise, and eat well; but today we slack off and watch Christopher Walken.
So what does all this have to do with economics? Traditional economics alwasys starts with the assumption of rationality. To model people's savings behavior, economists assume that people can accurately plan and save for the future. In fact, many people do not save enough money to continue their current lifestyle after retirement. Traditional economists simply say that they planned to decrease their consumption after retirement, but this seems unlikely to me. Behavioral economists, however, can explain this with the procrastination model!
In fact, two behavioral economists, Richard Thaler and Shlomo Benartzi, came up with a program called Save More Tomorrow to help people increase their savings. They have had good success, raising participants' savings rates an average of 10%. I'll explain how their program works in a future post.....
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