Intertemporal Choice Overview

• Definition: Intertemporal choices refer to decisions that have future consequences or effects that manifest over time after the choice is made.
  • Examples of intertemporal choices include:
  • Making large purchases on credit
  • Adjustments to insurance policies
  • Choices concerning diet, exercise, and smoking
  • Decisions regarding trust

Decision-Making in Intertemporal Choices

• How do we choose?
  • We typically choose the alternative that offers the highest value or utility.
  • This involves discounting delayed outcomes compared to immediate ones.
• Economic Theories:
  • Neoclassical Economics/Expected Utility Theory (EUT) dictates that discounting is typically exponential.
  • Exponential discounting: Involves discounting with a fixed percentage (δ) at each time step.
  • Individuals may exhibit different preferences leading to variability in patience levels.
• Example in Military Pensions:
  • Choice between a lump-sum payment and an annuity showed that choosing an annuity led to savings of $1.7 billion for the government.
  • Factors influencing the choice included demographic traits such as being White, female, and having a college education.
  • Calculated probability of reaching old age plays a significant role in these choices.

Discounting Mechanisms

• Neoclassical Economics Model:
  • Characterized by exponential discounting.
  • Considers fixed preference consistency over time (e.g., cake > apple today implies cake > apple tomorrow).
• Empirical Observations:
  • Individuals often do not discount exponentially; instead, they discount hyperbolically.
  • Hyperbolic discounting involves a fixed percentage (δ) and another constant percentage (β) that biases towards immediate rewards.
• Present Bias:
  • Defined as a disproportionate preference for smaller immediate rewards over larger delayed rewards; emphasizes that 'now' is deemed special.

Two-System Model of Decision Making

• Systems of Thought:
  • System 1: Fast, automatic, uncontrolled, associative, effortless, and unconscious.
  • System 2: Slow, reflective, controlled, deductive, effortful, and self-aware.
  • System 1 often provides intuitive solutions that are resource-efficient and serve as inputs for System 2, which engages in analysis and control.

Intertemporal Choice and the Two Systems Model

• Parameters and Neural Processes:
  • The β parameter represents the value placed on immediate rewards relative to future rewards.
  • The δ parameter represents the discount rate in standard exponential formulas.
  • It is suggested that the different systems (System 1 and System 2) are governed by distinct neural processes.
  • The reward system structures are related to β, while δ is associated with the prefrontal cortex activities, which support cognitive control functions (McClure et al. 2004).
• Neural Region Involvement:
  • Area activated during decision processes includes dmPFC, dlPFC, and IFG (inferior frontal gyrus).

Evidence on Intertemporal Decision-Making

• Contrasting Views:
  • Research indicates a struggle between the impatient self (System 1) and the patient self (System 2).
  • Conversely, Kable & Glimcher (2007) found no evidence supporting a division into two systems in intertemporal choice; instead, activity in areas like vmPFC tracked subjective value.
  • Cognitive abilities have been associated with a decreased rate of discounting delayed rewards, indicating lateral frontal cortex activity influences decision making.
• Behavioral Patterns:
  • Individuals with higher cognitive ability show greater activity in lateral frontal regions when opting for delayed rewards over immediate ones.
  • Steeper discount rates are correlated with behaviors like substance abuse and impulsivity, but some studies yield conflicting outcomes regarding cognitive control deficits.

Delay of Gratification Studies

• Marshmallow Test Outcomes:
  • Findings indicate that children who delayed gratification performed better later in life on measures such as SAT scores, planning ability, stress management, rational thought, concentration, and overall self-control.
  • The performance gap persists into adulthood, indicating a long-lasting impact of early self-control.
• Neurophysiological Factors:
  • Adults who succeeded at delaying gratification showed greater lateral PFC activity during tasks requiring behavioral control.

Summary of Intertemporal Choice

• Delay Discounting:
  • Delayed outcomes are consistently valued less compared to immediate ones.
  • Individual differences in discounting tendencies reflect levels of patience; steeper discounting correlates with higher impatience.
• Neural Responses:
  • Valuation regions exhibit varied responses aligning with the extent of delayed reward discounting, where lateral frontal areas promote patient behaviors while the striatum influences immediate reward preferences.
• Stability of Preferences:
  • Immediate versus delayed reward preferences appear consistent throughout an individual’s life span and relate to self-control and success measures.

Self-Control Dynamics

• Challenges of Self-Control:
  • Participation in self-control tasks usually engages the dmPFC and dlPFC during decision-making processes regarding liked but unhealthy items.
  • This emphasizes the role of cognitive control networks in regulating behavior and preferences, particularly in unhealthy choices.

Persistence in Decision-Making

• Rational Persistence:
  • Persistence regarding delayed rewards is rational only when the timing of those rewards can be reasonably predicted.
  • Children who did not persist during the marshmallow test may have perceived their environment as unpredictable, which is predictive of negative life outcomes.

Precommitment Strategies in Intertemporal Choice

• Example of Gym Membership:
  • Precommitment devices, such as a gym membership paying a fixed monthly fee versus a pay-per-visit strategy, illustrate how individuals attempt to enforce future behaviors to combat present bias. Challenges remain regarding conversion of intention into action.