Naive, resolute or sophisticated? A study of dynamic decision making

LUISS Rome Italy; University of York Department of Economics & Related Studies Heslington York YO10 5DD UK
Journal of Risk and Uncertainty (Impact Factor: 1.53). 02/2009; 38(1):1-25. DOI: 10.1007/s11166-008-9058-5
Source: RePEc

ABSTRACT Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses – to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naïve or resolute (with slightly more being naïve) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.

1 Bookmark
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We analyse life‐cycle saving decisions when households use simple heuristics, or rules of thumb, rather than solve the underlying intertemporal optimisation problem. We simulate life‐cycle saving decisions using three simple rules and compute utility losses relative to the solution of the optimisation problem. Our simulations suggest that utility losses induced by following simple decision rules are relatively low. Moreover, the two main saving motives reflected by the canonical life‐cycle model – long‐run consumption smoothing and short‐run insurance against income shocks – can be addressed quite well by saving rules that do not require computationally demanding tasks, such as backwards induction.
    The Economic Journal 05/2012; 122(05):479-501. · 1.95 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We show that quasi-hyperbolic discounting not only affects savings but also the demand for long-term care insurance. In general, the demand of quasi- hyperbolic discounting individuals differs from the demand of exponential discounters. Furthermore, quasi-hyperbolic discounters' insurance demand is time-inconsistent. In the presence of a binding liquidit y constraint in old age, they tend to buy less insurance than initially planned. Viewed from old age, individuals may regret having bought too little insura nce coverage. JEL-Classification: D61 ⋅ D91 ⋅ G22 ⋅ I19
  • [Show abstract] [Hide abstract]
    ABSTRACT: Potentially dynamically-inconsistent individuals create particular problems for economics, as their behaviour depends upon whether and how they attempt to resolve their potential inconsistency. This paper reports on the results of a new experiment designed to help us distinguish between the different types that may exist. We classify people into four types: myopic, naïve, resolute and sophisticated. We implement a new and simple experimental design in which subjects are asked to take two sequential decisions (interspersed by a random move by Nature) concerning the allocation of a given sum of money. The resulting data enables us to classify the subjects. We find that the majority are resolute, a significant few are sophisticated, rather few are naïve and similarly few are myopic.
    Journal of Risk and Uncertainty 01/2011; 42(2):85-123. · 1.53 Impact Factor

Full-text (3 Sources)

Available from
May 22, 2014