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“January is always a good month for behavioral economics: Few things
illustrate self-control as vividly as New Year’s resolutions. February is even
better, though, because it lets us study why so many of those resolutions are
broken.” Sendhil Mullainathan, Harvard University

It is that time of a year when we
take time to reflect upon our flaws and weaknesses to find areas where we can
make positive changes for the New Year. In our imagination, there is an old
self who we will leave behind on the New Year’s Eve, and we will welcome our new
2018 self, healthier, wiser, and most importantly, happier. All it takes is to
come up with that magical set of resolutions that will help us achieve all that,
though many of us probably will not need to come up with original New Year’s
resolutions. We can simply use our list from the last year which has been
hanging around under a pile of unused gym wear we bought early this year… Almost
certainly (more specifically, an 81%-92% chance according to empirical studies)
we have defaulted on our resolutions, but this time it will be different! 2018
self will not need a snooze button, will not stay late in the office, and for
sure will happily run on that fancy treadmill. Extreme optimism like this, despite
past experience, is relatively common, but nonetheless standard economic models
find it hard to explain.

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Economics is about understanding the
behavior of humans in economic decision-making environments. In order to
understand how markets work, we need to make bunch of assumptions that will
help us build useful and tractable economic models. Economic agents in these
models, having good access to information, can easily and meticulously add up
the costs and benefits of their choices, no matter long-term or short-term,
make a choice and stick to it, firmly.  Many
important contributions to understanding developments around us have been made
using this very simplified model of human behavior. However, the discrepancies
between theoretical predictions and actual realizations are sometimes both
systematic and significant, the New Year resolution default rate being just one
example.

In Homer’s epic poem, the Odyssey,
Odysseus is warned about the Sirens, who seduce sailors with their alluring
singing. Odysseus was very interested in hearing what the Sirens sang to him,
and so, following the advice of Circe, he ordered all of his sailors to plug
their ears with beeswax and tie him to the mast. He instructed his men to leave
him clinched securely to the mast, no matter how much he might beg. Odysseus’ solution
to his problem is a perfect example of trade-offs we face every day between short-term
temptations, such as unhealthy but divinely tasty snacks, shopping sprees, or a
mug of beer on a couch, and long-term wellbeing, health, or financial security.

Standard economic theory fails to
explain this phenomenon due to the assumption that our choices about our actions
in the future are time-consistent. That is, our choices should not depend on
when we are asked to make the choice. This is described using discounting – the
assumption is that value of benefits or costs are reduced by a constant factor
with every passing month or year, and that therefore preferences over two
future alternatives will always remain the same no matter when the choice is
made.

Asked on his first day of long
journey to Ithaca, Odysseus was determined to return back home to reassert his
place as a king of Ithaca.  By the time
he was passing by the land of Sirens, he should have still been committed to
going to home right away. However, as Odysseus’ breakdown demonstrates, it is quite
possible to change your preferences, at a later stage, when choosing between the
two options. In a similar vein, when asked today to make a choice between
spending next Friday evening at the gym or on the couch, we might well choose
to go to gym, but come next Friday, it is highly likely we will end on a couch,
devouring heavenly German beer. The explanation for this phenomenon is that we
care more about the experiences that are close in time, and therefore we
discount more rapidly early on. Surrendering to short-term temptations is key
reason why our plans to save for the future, or make healthier lifestyle
choices, often fail.

Richard Thaler, a Chicago-based
behavioral economics and 2017 Nobel Prize Laureate, has, together with his
fellow behavioral economists, created alternative models for describing the
dilemma caused by the internal tension between a long-sighted self (planner)
and a short-sighted (doer) self. The goal of a planning self is to increase
long-term happiness, while the doing self is mostly concerned with short-term decisions.
The planner, being aware of the doer’s myopic nature, can decide to either
reduce his short-term consumption by applying willpower, which carries a psychic
cost, or as with Odysseus, the solution to the dilemma may be often about
helping the planning by removing short-term courses of action. This dual nature
of self has also been adopted in modern psychology and has been supported by
recent research in neuroscience – seems like different parts of our brain are
responsible for short-term and long-term planning.

Where in our modern life should
we seek for Odysseus-style “tying ourselves to the mast” help?

Theoretical and empirical work of
behavioral economists, just like Thaler, offer a number of suggestions to help
us deal with our short-sighted self. These are in line with the theoretical
predictions discussed above. The key to success is pre-commitment, and staying
accountable and sane by limiting the extent of willpower we force ourselves to
exert.

Here are some tips that can help
you get started with your resolutions for 2018:

Ø  Pre-commit
yourself

Order a weekly delivery of food
on inebe.ge (http://www.inebe.ge) or any other food delivery service providers
that accept orders well in advance of the time you actually get hungry and need
to eat. Researchers from Harvard Business School looked at a year’s worth of
customer orders from an online grocer. They wanted to find out whether a delay
between order completion and order delivery would have an effect on which items
the customers chose to buy. Indeed, the data showed that customers tended to
order a higher percentage of “should” items (like vegetables), and a
lower percentage of “want” items (like candy bars), the further in
advance they placed an order.

Sign up for an automatic monthly
transfer from your bank account into a savings account or pension account. This
quick, one-time decision to transfer money will help you keep spending within a
budget, while also helping you to save for future financial security. Harvard
University Professor Raj Chetty, with his colleagues, provided evidence that
automatic pension plan enrollment mechanisms increase total savings, because
the plan produces savings without the psychic costs of inducing regular willpower.

Establish your own set of
behavioral rules. Negotiating with ourselves and assessing the costs of
benefits on a constant basis takes mental resources and willpower to make sure
our short-term decisions are always aligned with our long-term goals. Deciding
to avoid such negotiations can help you. One way is to eliminate carbohydrates
from your diet or cigarettes in their entirety, without any ifs, ands, or buts,
rather than go on a calorie-watch or smoke rationing.

Ø  Stay
accountable

Make a bet with your friends, so that
every time you are caught eating something unhealthy, you will be punished by
specific amount of money. And if you find that it does not help, increase the
amount, or make the deal with someone you don’t like that much (maybe, your mother-in-law).

These days there are mobile apps
for anything, including one that helps you to sign a binding “Commitment Contract”
with yourself. StickK1
(http://www.stickk.com/), co-founded by Yale
academics Dean Karlan and Ian Ayres, allows you to set a specific goal, specify
some stakes that you would hate to lose, like making donations to an organization
that advocates for ideas you strongly oppose. The website also allows for
referees, people selected by the user to help monitor the progress of their
contract. When a user submits a report to the website, the referee is asked to
confirm the accuracy of the report.

 

Ø  Stay
sane

Self-control is costly. Exercising
constant restraint causes a depletion of brain resources, and we are left with
less energy to resist the next one. When choosing between different options to
achieve your goals, go with the one that minimizes the amount of self-control,
such as choosing exercising over dieting. While exercising regularly requires willpower,
unlike dieting, it does not require constant use of self-control. As regular
exercise become a habit, it requires lesser mental resources to keep yourself
in shape.

One final recommendation is to
take advantage of the overwhelming motivation at the start of the New Year, and
take actions now that will commit us to making good decisions throughout the 2018.
Happy New Year!

1
Their website proudly reads “Congratulations to our friend Professor Richard
Thaler for winning the

2017 Nobel Memorial Prize
in Economic Sciences. For those who are not aware, stickK is based in part on
Thaler’s nudge theory and is proud to call Professor Thaler a friend and
inspiration.”

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