In this blog post, we will look at why people are swayed by small rewards in the present and give up larger rewards in the future, based on an experiment by behavioral economist Thaler.
Behavioral economist Thaler’s experiment clearly shows how human choices change over time. If you were given an apple, would you prefer to receive one apple a year from now or two apples the next day? Then, after nearly a year has passed, if you had to choose between receiving one apple today or two apples tomorrow, which would you choose? When Thaler conducted an experiment with these two questions, most of the participants chose two apples in the first question. However, in the second question, many participants chose one apple now.
The reason why people preferred to receive two apples one year and one day later rather than one apple one year later was because they thought that the utility of a large future benefit was greater than the utility of a small future benefit. However, when the time comes for the future benefit to become a reality, the magnitude of the utility is reversed. This means that people’s preferences are not always constant but change over time. Thaler noted that many people gave inconsistent answers in this experiment. Contrary to the traditional economic view that people make rational and consistent choices, Thaler analyzed that inconsistent choices are closer to human nature. Based on this analysis, Thaler proposes a method of eliminating one future option so that people can make consistently rational choices. This is called a “self-binding commitment.”
Self-binding commitments are a way of reducing or eliminating choices by offering a “carrot” that is too good to refuse or a “stick” that is too bad to accept, making it impossible to break the commitment. Let’s say that some people know that saving money will benefit them in the long run, but when the time comes to make a choice, they are swayed by the immediate temptation of consumer spending. For such people, it is possible to encourage them to make rational choices by offering them a significant additional interest rate if they maintain their savings until maturity, or by deducting a considerable amount if they cancel their savings product midway.
Such self-binding commitments are not limited to economic behavior, but can be applied to various areas of life. For example, if someone decides to exercise for their health, they can promise to exercise every day with a friend in exchange for a certain amount of money. If they fail to keep their promise, the money goes to their friend. This way, the loss of not exercising is so great that it motivates them to exercise.
Self-binding commitments can also be used effectively within organizations. For example, instead of paying bonuses to employees when they achieve certain goals, a company can introduce a system of penalties for failing to achieve those goals. This can be a motivating factor for employees to work harder to achieve their goals. As you can see, self-binding commitments are a concept that can be applied in various fields, from individual lifestyles to organizational operations.
Of course, traditional economics also uses the concepts of carrots and sticks. Unreasonable behavior is discouraged by imposing fines, while reasonable behavior is encouraged by providing subsidies. In contrast, behavioral economists believe that carrots that are too good to miss and sticks that are too harsh are necessary. This is because existing incentives may not be strong enough to overcome the impatience of people with inconsistent preferences.
In addition, behavioral economists proposed the concept of “opposite incentives,” which is different from existing incentives. The existing concept of incentives was to offer carrots or sticks related to A in order to make people choose A. However, in opposite incentives, carrots or sticks are offered for B, which is opposite to A, in order to make people choose A. When people are presented with a strong carrot or stick as a counter-incentive to A, they tend to reject the carrot or stick and choose A over B. This counter-incentive is being used effectively by governments and companies.
When promoting policies, the government can use counter-incentives to encourage citizens to act in the desired direction. For example, to encourage recycling, instead of providing tax benefits to households that recycle a certain amount of recyclable materials, the government can introduce a policy of imposing fines on households that do not recycle. This can be an effective way to make citizens aware of the importance of recycling and encourage them to participate actively.
Companies can also use disincentives to influence consumer behavior. For example, they can offer discounts to consumers who purchase environmentally friendly products and impose additional charges on those who purchase non-environmentally friendly products. This allows consumers to contribute to environmental protection while enjoying economic benefits.
Thaler’s research emphasizes that human choices are not limited to economic gains but are greatly influenced by psychological and social factors. This opens up the possibility that behavioral economics can understand human behavior in a different way from traditional economics and, based on this, propose more realistic and effective policies and strategies.
