Behavioural Economics: A closer Look At Decision Making - chapter 8

8.1. Time Inconsistency, Competing Selves, and Commitment

• The idea that people can hold 2 inconsistent sets of preferences
  • what we would like to want in the future
  • what we will want in the future, when it comes
• time inconsistency: when people change their minds about what they want simply because of the timing of the decision
  • people are time inconsistent when they say they will prefer good 1 next week, but then switch to good 2 when they can consume it immediately
  • Explains behaviours like procrastination and lack of self-control
  • A time-inconsistent person is neither irrational or rational
  • Future-oriented and present-oriented selves within the individual are rationally pursuing their own objectives
• commitment device: strategy or tool that allows people to place restrictions on later choices now so they can make better decisions in the future

8.2. The Sunk-Cost Fallacy

• sunk costs: costs that have already been incurred and cannot be recovered or refunded
• There’s no sense in considering sunk costs when weighing the trade-off between opportunity cost and benefits
• The rational conclusion is to accept the sunk cost, however, people often lose the opportunity cost through lost time

8.3. Undervaluing Opportunity Costs

• If the benefit you get from a good is concrete and immediate, you will overvalue it, compared to an abstract and distant good, which is undervalued
• People are prone to undervaluing opportunity costs that are non-monetary, such as time
• The implicit cost of ownership is the cognitive bias documented by behavioural economists that leads people to value things more once they possess them
  • another non-monetary opportunity cost that is often overlooked

8.4. Forgetting About Fungibility

• Fungible: easily exchangeable or substitutable
• Commodities are fungible (ex. money)
• Separating money into mental categories may help organize a person’s expenditures and stay on budget instead of spending it
  • Reduces financial risks
  • People who have recently gained some money are more likely to spend it recklessly