The problem of excessive future discounting and

addictions

Why train the elephant?

Dr. Russell James III, Texas Tech University

Elephant in charge

Short-termImpulsive DoerPassionsAffective/VisceralHot state

Long-termPatient PlannerImpartial spectatorDeliberative Cold state

If given total control, the “elephant” side makes choices detrimental to future success and happiness.

Problems with an untrained elephant…

Decisions dominated by the short-term, impulsive self tend to reduce future happiness and success due to:

1. Excessive future discounting

2. Finding negative addictions

3. Avoiding positive addictions

Problems with excessive future discounting

Future discounting The rate at which you

are willing to trade immediate experience for future experience.

Today, I can drive away in a new car with

nothing down!

In the future, I’m paying 14% interest on an asset with disappearing value.

Excessive future discounting

The rate at which we are willing to trade current experience for future experience reflects our rate of future discounting.

Today I can spend $100 borrowed on my credit card

In the future, I will pay $150 in accumulated interest/penalties

Where will you change from saying “yes” to the saying “no”?

Future discounting

If you were in a mall and wanted to buy something, how much would you be willing to pay for $100 right now?

Today $100 borrowed

Next month $99 owed.

Next month $95 owed.

Next month $100 owed.

Next month $101 owed.

Next month $102 owed.

Next month $105 owed.

A

B

C

D

E

Future discounting in other areas

Short-termImpulsive DoerPassionsAffective/VisceralHot state

Decisions by the elephant tend ignore future consequences.

Future discounting in eating

Healthy?Unhealthy?Moderate?Excessive?

Future discounting in drinking

None?Moderate?Excess?

Future discounting in education

Graduate? Drop out?

Future discounting in sexAbstain?

Monogamy?Serial monogamy?

Risky?

Future discounting in exercise

None? Rare? Regular?

Excessive future discounting

Short-termImpulsive DoerPassionsAffective/VisceralHot state

The elephant-side may make “fun” choices, but you could end up broke, obese, ignorant, hung over, diseased, and dying!

Future discounting and success in children

“Those 4-year-old children who delayed gratification longer in certain laboratory situations developed into more cognitively and socially competent adolescents, achieving higher scholastic performance and coping better with frustration and stress.”

http://www.youtube.com/watch?v=M0yhHKWUa0g

Mischel, W. (Columbia), Shoda, Y. (Columbia), Rodriguez, M. (Columbia), 1989, Delay of gratification in children. Science, 244, 933-938.

Time horizon and wealth building

In 1998 about 5,000 people were asked:“In planning your saving and spending, which of the following time periods is most important to you,

the next few months, the next year, the next few years, the next 5-10 years, or longer than 10 years?”

Comparing people with the same starting wealth, did those with longer time horizons accumulate more

wealth in the following 8 years?

Wealth growth and time horizon

Comparing with the wealth growth of other people with the same starting wealth:

Answer in 1998: Financial Planning Time Horizon

1998-2006 change in wealth v. Others with identical starting wealth

next few months No significant differencethe next year No significant differencethe next few years No significant differencethe next 5-10 years + $157,427 more than otherslonger than 10 years + $240,699 more than others

Other research finds:Planning ahead→wealth“Why do similar households end up with very different levels of wealth?”

“We use new and unique survey data to assess these differences and to measure each household’s ‘propensity to plan.’ We show that those with a higher such propensity spend more time developing financial plans, and that this shift in planning is associated with increased wealth.”

Ameriks, J., Caplin, A. (NYU), Leahy, J. (NYU). 2003. Wealth accumulation and the propensity to plan. Quarterly Journal of Economics, 118(3), 1007-1047.

Problems with an untrained elephant…

Decisions dominated by the short-term, impulsive self tend to reduce future happiness and success due to:

1. Excessive future discounting

2. Finding negative addictions

3. Avoiding positive addictions

Finding negative addictions

Short-termImpulsive DoerPassionsAffective/VisceralHot state

The elephant is experiential. Consequently, the elephant side craves experiential variety.

Variety enhances experiential utility

Variety is important because “diminishing marginal utility” changes preferences. When enjoyment drops, we switch to another choice.

Hot Dogs Consumed

Utility from Each Hot Dog

1 +102 +43 04 -15 -46 -10

But, unlimited experimentation is risky due to negative addiction “traps”

The rider “knows” that meth generates a high (and has terrible future consequences).

Although the elephant doesn’t care about the future, it hasn’t experienced the effects, so it isn’t tempted.

Addiction alters the ability of the rider to control future choices.

The elephant gradually loses ability to experience other types of enjoyment, and focuses exclusively on the addiction.

Negative addictions as a path dependent preference

A negative addiction is • initially pleasurable • gradually requires more

consumption to reach the same level of satisfaction• lowers satisfaction from

other items (Anhedonia)• creates future harm

Anhedonia

The inability to experience pleasure from normally pleasurable life events

Can result from the use of artificial dopamine stimulants like cocaine or amphetamines (negative addictions)

The negative addiction trap

How does a negative addiction affect– Future Choices?– Future Satisfaction?– The Future Brain?

Work in groups of 2-5 people. After the video, discuss and have one person write down your thoughts

Addiction.wmvhttp://www.hbo.com/addiction/thefilm/centerpiece/616_segment_5.html

“Rationality” inside a negative addiction

“[previous research shows] people who discount the future heavily are more likely to become addicted.

Our result establishes the converse, that harmful addictions induce even rational persons to discount the future more heavily, which may in turn lead them to become more addicted.”

Becker, G. (Chicago) & Mulligan, C. (Chicago) , 1997, The endogenous determination of time preference. Quarterly Journal of Economics, 113, p.744

“Rationality” inside a negative addiction

We could work through the mathematics of the model from Nobel prize winning economist Gary Becker…

but, instead, let’s try…

Becker, G. (Chicago) & Mulligan, C. (Chicago) , 1997, The endogenous determination of time preference. Quarterly Journal of Economics, 113, p.744

Translating Gary Becker using Jeff Spicoli

• Look, it’s not like he is giving up a future career as a brain surgeon or something.• Even if he could have done that

at one point in his life, that is no longer an option due to the effects of addiction. • So he isn’t giving up that much

more by continuing to diminish his (already limited) future prospects.

Rationality inside a negative addiction

The initial meth user may be giving up a lot of future opportunities for using.

After continued use, she may not be giving up as many future opportunities to keep using.

Path dependent preference: negative addiction

A low concern for the future

addictive consumption (diminishes future options)

Diminished future options means additional loss from further consumption is less

Non addictive consumption ↓ reward

Anhedonia ↑

Applying concepts to practice

An Interview with Kathleen T. Brady, M.D., Ph.D., Professor and Director of the Clinical Neuroscience Division at the Medical University of South Carolina.

Anhedonia and early intervention

http://www.hbo.com/addiction/thefilm/supplemental/621_kathleen_brady.htmlFrom start of “How Does Addiction Affect the Brain?” until just before start of “What aspects of a person’s life need to be addressed in recovery?” (Ending segment of chapter 1 on the website)

Negative addictions and the paradox of consumption variety

• Unlimited consumption experimenting risks negative addiction.

• Negative addiction leads to exclusive focus on the addictive item.

Unlimited consumption variety for immediate experience

Negative addiction

Extreme focus on addiction with poor life experiences

Problems with an untrained elephant…

Decisions dominated by the short-term, impulsive self, tend to reduce future happiness and success due to:

1. Excessive future discounting

2. Finding negative addictions

3. Avoiding positive addictions

A negative addiction is • initially pleasurable • gradually requires

more consumption to reach the same level of satisfaction• lowers satisfaction

from other items (Anhedonia)• creates future harm

A positive addiction is • initially not very

enjoyable• gradually becomes

more enjoyable with experience• creates future

benefits

Discussion question

Can you think of things that are 1. Good for you (or are at least not harmful)2. May not be initially enjoyable 3. Gradually become more enjoyable with

continued experience?

Work in groups of 2-5 people, discuss and have one person write down your ideas

Potential positive addictions

• Education in a particular field of study• Exercise• Religious practice• Reading complex novels or non-fiction• Watching opera, ballet, football, equestrian,

basketball • Playing a musical instrument or a sport

Consumption capital and positive addictions

Experience leads to greater understanding, appreciation, and enjoyment. This accumulated experience resulting in greater enjoyment is called “consumption capital”

Sing, o muse of the pernicious anger of Achilles…

Path dependent preference: positive addictions

Low current utility but with future benefits

Practice increases enjoyment of future consumption

Increased current utility leads to more practice

Consumption Capital ↑External

Benefits ↑

Planned and unplanned focus

Unintentional focus• Ignoring long-term

outcomes• Negative addictions• Increasing focus on

addictive substance• Decreasing

opportunities

Intentional focus• Planning for long-

term outcomes• Positive addictions• Increasing focus on

long-term behaviors• Increasing

opportunities

If you feed it, it will growEarly decisions are like yeast (a.k.a. “path dependent preferences”)• An early decision for short-

term, visceral choice can reduce future options and lead to preference for more short-term, visceral choices

• An early decision for long-term goal achievement can lead to more opportunities for goal achievement

Overcoming misleading experienceIn the case of both negative and positive addictions, initial experience is misleading.• Negative addictions provide

initial positive feedback• Positive addictions provide

initial negative feedback

Overcoming misleading experienceBecause of this false experience feedback, ideal outcomes require externally influencing the choice environment.

By You By The Law By Your Mother

Elephant training by environmental control

Criminalizing or subsidizing choices

Training, guilt, nagging, etc.

Slides by: Russell James III, J.D., Ph.D., CFP®Associate Professor Division of Personal Financial Planning Texas Tech Universityrussell.james@ttu.edu

Please use these slides!

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Thanks!

The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component