Overestimating Self_Control: Evidence from the Health Club Industry
University of California, Berkeley; National Bureau of Economic Research (NBER)
University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
NBER Working Paper No. w10819
Experimental evidence suggests that people make time-inconsistent choices and display overconfidence about positive personal attributes. Do these features affect consumer behavior in themarket? To address this question we use a new panel data set from three US health clubs with information on the contract choices and the day-to-day attendance decisions of 7,978 health club members over three years. Members who choose a contract with a flat monthly fee of over $70 attend on average 4.8 times per month. They pay a price per expected visit of more than $17, even though a $10-per-visit fee is also available. On average, these users forgo savings of $700 during their membership. We review many aspects of the consumer behavior, including the interval between last attendance and contract termination, the survival probability, and the correlation between different consumption choices. The empirical results are difficult to reconcile with the standard assumption of time-consistent preferences and rational expectations. A model of time-inconsistent agents with overconfidence about future patience explains the findings. The agents overestimate the future attendance and delay contract cancellation whenever renewal is automatic. Salesman pressure and overstimation of future efficiency are the leading alternative explanations.
Number of Pages in PDF File: 44
Date posted: October 19, 2004
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