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FRANK SCHILBACH: Welcome to lecture three.

Today and on Wednesday, we're going

to talk about time preferences and particular theory.

We're going to talk a lot about a lot of applications,

a lot of applications that are sort of close

to your real world, including procrastination of problem

sets, all sorts of other choices such as credit card debt,

and so on, and so forth.

Can you be a little quiet?

Thank you.

Think of the lectures today and on Wednesday

building some framework and some sort of structure

and how to think about these things.

It's a little drier than maybe other lectures, in part

because it's about theory, and about writing down a model,

and trying to think about the world.

Partially we're doing that to sort of try

to explain behaviors that we see in the world,

partially we do that because at the end,

we try to think about welfare and how

to evaluate certain outcomes-- is

that good or bad-- certain policies and things to do,

which later in the course we're going to talk about.

But for that you, need some structure

how to think about some of those things.

At the heart of it, a lot of this

is about procrastination, about choices between the present

and the future.

Your problem set, in part, is also about procrastination.

It will be posted later today, probably late.

Please do let us know if you have any questions.

As I said, please be on time.

Do the readings.

There will be random pop quizzes.

They will be at the beginning of the class,

so you should be on time.

The laptop section is still over there.

If you want to use your laptop, it should be there, ideally,

in the front, in part because you're not

going to bother others.

I saw quite a few people using their phones

in class in previous classes.

Try to not do that.

That's not good for you.

You will not be able to take away much from the class.

Multitasking is very hard for people to do.

Again, I'll show you some evidence on that.

As I said, the problem set will be posted shortly.

If you have any questions, please do let us know on Piazza

and help others answer them or answer them for others.

I have office hours, usually Tuesday afternoons.

Please sign up for them.

I'm very happy to meet you.

It's very hard for me to meet people or get to know you

in the large class otherwise.

So please come to office hours.

I'm happy to talk to you about anything

you're interested in, ideally related

to behavioral economics.

So let me give you an overview of this and the next lecture.

We're going to talk first about exponential discounting.

Why are we talking about exponential discount?

This is the workhorse model of classical economics.

This is how economists usually think about choices over time.

Second, we're going to identify some problems with this model,

and try to think about why is this model perhaps not

explaining things well, at least in some settings?

And how could we improve on that?

I'm going to propose an alternative model, which

is the quasi-hyperbolic discounting model.

And then we're going to talk about sophistication

and naivete, which is the idea that if you think

you have different preferences in the present form

in the future, then it becomes very important to understand.

Do you actually know what's going on?

Do you know that in the future you might be impatient,

or do you perhaps think that in the future,

I will be very patient, and then perhaps make

some mistakes accordingly?

I'll get to this in more detail.

So it's first important to notice

that any choice, essentially almost any choice you

make, almost always involves some choice over time.

Essentially, some trade-off between the present,

between some cost and benefit that you might occur

in the very short run, and some costs and benefits

that you might enjoy or incur in the future.

What examples do we have?

What choices over time do we face?

Yes.

STUDENT: Savings versus consumption.

FRANK SCHILBACH: Uh-huh.

And how do you decide how much to save?

STUDENT: Depending on your preferences and interests,

right?

FRANK SCHILBACH: Right.

So you have the choice, for example,

if you think about should I save some money, let's say,

for next semester or next year.

So your choice is either to consume the money now

in various ways-- eat food or whatever

you would like to do with it, spend it on various activities.

So if you save, if you make the decision to save,

you have to give up some money now,

and you get some benefits in the future.

The benefits in the future are determined by the interest

rate, as you say.

If you have a savings account or the like,

you can essentially get some benefits in the future.

And then you have some costs in the present, which

would be essentially not consuming now,

and some benefits in the future, which is getting

that money in the future.

And then you need to somehow decide is that worth doing.

There's some cost and benefit.

We need to aggregate somehow, whether to make that choice.

Any other choices you make over time?

Yes.

STUDENT: Whether to go to college or not

or start working right away and make some money

or delay that income.

FRANK SCHILBACH: Right.

So I actually have this example here-- going to school.

It has some costs and benefits.

And what are the costs and benefits of doing that?

STUDENT: You sacrifice four years

or whatever right now versus supposedly

a higher income later on.

FRANK SCHILBACH: Exactly.

So you have direct costs of education,

which is tuition in many cases.

Sometimes that's sponsored, but often there's tuition.

It's quite a bit of money.

It's also the opportunity cost, which is often forgone wages.

You could be working otherwise and make more money.

There's the joy of pain of going to school.

Some might think it's positive.

Some might think it's negative.

And then there's future wages, which in many cases,

at least for you guys, tend to be

higher from going to college.

If you do a PhD, that might not be the case.

I'm not sure if the TA's are here, but yes.

I'm sorry for that.

And then you have to decide are you going to school or not.

What do you need to do is you need to determine

the utility, the value of each of these costs and benefits.

And they occur in different points in time.

You need to make some estimates.

And then, of course, there's risk and other issues involved.

You might not have full information, and so on.

But assuming that all away, suppose

you knew all the costs and benefits of going to college.

Then you have to decide, is that worth doing?

So somehow you need to aggregate these costs and benefits

over time by putting appropriate weights

on different periods in time, and decide,

should I do this or not.

OK.

Yes, any other similar choices that people make?

Yes.

STUDENT: [INAUDIBLE]

FRANK SCHILBACH: Right.

For example, you could think about

should I do a problem set?

Should I come to class?

Should I study for an exam, and so on.

Often, there's costs and benefits involved.

Often, the costs are immediate.

You have to work on the problem set.