Learning and Visceral Temptation in Dynamic Savings Experiments

Abstract:     
This paper tests two explanations for apparent undersaving in lifecycle models: Bounded rationality; and a preference for immediacy. Each was addressed in a separate experimental study. In first study, subjects saved too little initially - providing evidence for bounded rationality - but learned to save optimally within four repeated lifecycles. In the second study, thirsty subjects that consume beverage sips immediately rather than with a delay show greater relative overspending, consistent with quasi-hyperbolic discounting models. The parameter estimates of overspending obtained from the second study - but not the first - are in range of several empirical studies of savings (with an estimated [beta]=0.6-0.7).

Number of Pages in PDF File: 49

Keywords: behavioral economics, dynamic optimization, experimental economics, hyperbolic discounting, lifecycle savings, social learning

JEL Classification: C61, C91, D83, D91

Accepted Paper Series