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Game theory in the popular press.


The economics of deferred gratification


Steven E. Landsburg
July 14, 1999
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When my friend Ralph Cohen announced that his wife was pregnant, I asked what path he hoped his child would follow. "It doesn't matter," said Ralph. "If he's happy, I'll be happy." Then, after a thoughtful pause he added, "My personal preference is shortstop. But anything he wants to do is fine with me." Then, after a longer pause: "As long as it's in the infield."

That's the difference between ordinary altruism, where you care about other people's happiness (though perhaps not as urgently as you care about your own), and what I'll call "imperfect altruism," where you reserve the right to care about how others achieve their happiness.

We all feel altruistic toward our own future selves. That's why we make current sacrifices for future rewards. But which kind of altruists are we? Traditional economic theory says we're the ordinary kind--we want to be happy in the future, though perhaps not as urgently as we want to be happy in the present. David Laibson, a professor of political economy at Harvard, is one of a few iconoclasts who disagree. Nobody doubts that we are imperfectly altruistic toward others. Laibson argues that we can be imperfectly altruistic toward ourselves. And just as imperfect altruism toward your children can cause conflict in your family, imperfect altruism toward your future self can cause conflict in your soul.

Here's an example: Everyone knows that a taste for expensive pleasures can ruin your life. But a taste for anticipating expensive pleasures can ruin your life in a far more interesting way. If your greatest joy in life is looking forward to tomorrow's extravagance, you've got a problem: Tomorrow is a moving target. On Monday, you plan a lavish party for Tuesday; when Tuesday arrives, you indulge your preference for anticipation by postponing the party till Wednesday. The postponements continue until you die and leave a large estate.

The tragedy here is not that you never get to spend your money. The tragedy is that you never even get to anticipate spending your money, because you're smart enough to foresee the whole sequence of events even before it unfolds. If you love looking forward to parties and if you know you love looking forward to parties, then you can never look forward to a party. Maybe this was what Bertolt Brecht meant when he said his life had been ruined by intelligence.

The solution, if you can manage it, is to plan a party that can't be postponed. Pay the caterer well in advance, and be sure to choose one who will penalize you heavily for a last-minute cancellation.

I suffer from a minor but aggravating form of this affliction. I avoid reading really good books, because it robs me of the pleasure of looking forward to them. Of course, knowing this about myself, I never get to look forward to them either. Air travel has been my salvation. I force myself to read good books by trapping myself with them on airplanes. If they ever upgrade those in-flight magazines into a plausible reading alternative, I'll be ruined.

My friend Ray Heitmann suffers from the equal and opposite problem. Instead of looking forward to extravagance, he likes to anticipate his own future frugality. He particularly enjoys believing that after a certain age, he won't spend resources to prolong his own life. But he's painfully aware that the "certain age" keeps getting redefined so it's always safely in the future. Therefore, he's looking for ways to limit his own future freedom of choice.

If Ray cared only about his own future happiness (or, to put it another way, if Ray were perfectly altruistic toward his future self), then you could fairly accuse him of inconsistency: Limiting your choices can't make you happier. But Ray cares also about how he achieves his future happiness, which makes him an imperfect altruist, but a consistent one. If your altruism is imperfect, you can want your future self to throw a party (or to read a book or to forgo expensive medical care, or for that matter to save money or to quit smoking), even though you know your future self would prefer otherwise.

When Dorothy Parker lamented that "I hate writing, but I love having written," she was expressing the sort of routine tradeoff between current costs and future benefits that fits right into the traditional economic framework. Laibson's imperfect altruists face a far subtler problem--they're not just weighing costs and benefits, they're engaged in games of strategy against their future selves.

That suggests a new answer to a question I raised in this space a few months ago, namely "Why do people lock their refrigerator doors?" My suggestion then was that the lock resolves a conflict between you (who believe that a hot fudge sundae is worth the calories) and your mate, or potential mate (who believes otherwise). According to Laibson, the conflict is not between you and your mate, but between you-today and you-tomorrow. I don't know which theory is right, but I do know that the door locks remain inexplicable unless you are in conflict with someone. If all you want for your future self is happiness and if there's no third party involved, there can be no good reason to restrict your future options.

Professors Per Krusell and Anthony Smith point out that Laibson's theory makes some surprising predictions about the way people save. Suppose you want to be frugal in the future. If you're a pessimist and don't trust your future self to be frugal, then you might as well spend all your money today so it doesn't fall into the hands of that future spendthrift. But if you're an optimist and expect to practice future self-control, you'll be inclined to save your money and pass it along into your own future good hands. Either behavior is self-reinforcing from one year to the next. So--contrary to what we're told by orthodox economic theory--two individuals with exactly the same preferences and exactly the same opportunities can adopt dramatically different attitudes toward saving.

If you enjoy contemplating your own future extravagance (as opposed to frugality) then Krusell/Smith reasoning suggests something even more bizarre: The more you expect to be extravagant in the future, the more you'll save to finance that future extravagance. But as soon as you realize you're a "saver," you'll lose confidence in your future extravagance and figure you might as well spend your money today. At that point, you realize you're a "spender" and you go back to saving. Your expectations about the future, and the behavior that stems from them, could fluctuate wildly.

Why would human beings have Laibson-style preferences in the first place? Here's a wild speculation. Laibson-style preferences lead to visible attempts at self-control, and visible attempts at self-control are reassuring to potential mates, hence favored by natural selection. If that speculation stands up to some reasonable tests (say a computer simulation of resource competition among individuals with evolving preferences), it could tie the two refrigerator-lock theories together into a single neat package.

1999 Microsoft Corporation.