Tags:: #🌱 <% tp.file.cursor(3) %> Links:: <% tp.file.cursor(4) %> [[You can't get rid of your biases, only temper them]] [[Humans allow irrelevant uncertainties to influence their decision making]] [[Intertemporal choice regarding future tastes]] # Intertemporal choice, making trade offs over time ### Summary Intertemporal choice involves making choices about thing that happen over time. If we rigorously analyzed every aspect of a intertemporal decision we wouldn't make any action, so economists simplify decisions by assigning costs or benefits of decisions with utilities in units called utils. The ideal person would make decisions objectively regardless of time, but real people suffer from present bias and discount the utility of things over time. One of the best ways to make decisions with this in mind is to make a hard commitment and stick to it on the day you commit to it. You can add accountability to this commitment through telling others or creating a punishment if you don't do the thing. # How we ought to make choices Say you suddenly had $180,000. What would you do with it? Let's first ask what we could use it on: - regular bills - necessities - pay off debt - saving for distant future - ready for surprise events - discretionary funds #### Intertemporal choice with money Economists know if you had to pay attention to all of this you would never make any money decisions. So they simplify it down to how much you spend per month with four main concerns: - Consumption smoothing - Impatience - You prioritize short term reward over long term reward - Rate of return on savings - Concern for unexpected events - Emergency savings #### Intertemporal choice with time allocation Similarly in a time allocation domain for instance planning when to do an essay there are four main factors in the ideal economic scenario: - Impatience - Opportunity costs - Productivity-time/energy/focus - Concern for unexpected events ### Economics Approach to Making Decisions In These Areas Economists approach these decisions by assigning value to each option either positive or negative using values they call utils to signify utility. **Without any biases or preferences you would choose the option that maximizes or minimizes the discounted sum of utilities depending on if it's a positive or negative decision.** The absolute value of the utils doesn't matter as much as the relative value of the utils to each other meaning you can assign values on any number scale as long as relatively they make sense. # How we actually make choices In real life, we don't give things objective utility without regard for its time. ## Present Bias We suffer from [[Present bias]]. **We value immediate gratification over long term reward.** This can be shown in the previous economic model through two ways: 1. Exponential discounting 2. Flat discounting ### Exponential Discounting In exponential discounting the util value of something gets multiplied by some constant that exponentially goes down over time. **This type of discounting is indicative of decisions over a very long time horizon like months and years.**  The more your prioritize the now rather than the future the lower your discounting value. Here's an example where discounting would cause option B to be chosen:  **The longer the time horizon the lower delta is.** For daily, weekly, and sometimes monthly decisions the value of delta is around 1. As soon as it goes past weekly horizons the value of delta can have drastic consequences on our decision making if we aren't careful. ### Flat Discounting In flat discounting we discount the future by some flat rate without taking into account how long far away that future event is. **This type of discounting is indicative of a very short time horizon like days, weeks, and sometimes months.**  In contrast to discounting where options are exponentially given less weight as time goes on, in present bias we overvalue the immediate future and bias everything in the future by some value. # How we can make the former more like the latter Taking present bias into account, one of the best ways we can improve our intertemporal decision making is becoming aware of our present bias tendencies. This requires building meta awareness. ### The Two Types of Meta awareness In Decision Making - Sophisticates: Sophisticates are fully aware of their future self control problems and thus correctly predict their future behavior. - Naifs: Naifs are fully unaware of their future self control problems and thus expect to behave in the future exactly as their present self believes they will do. **In reality, most people are a mix of Sophisticates and Naïfs.** They have some awareness for their future self control problems and some unawareness. You can build your meta awareness by assessing your commitment tendencies in the past, through asking others or through analyzing your journal entrees. **Do you tend to do the things you commit to?** If you do, you have good meta awareness of decision making. One of the best ways to make decisions with present bias in mind is to make a hard commitment and stick to it on the day you commit to it. You can add accountability to this commitment through telling others or creating a punishment if you don't do the thing.