Goal Setting as a Self-Regulation Mechanism
36 Pages Posted: 20 Oct 2008 Last revised: 9 Jun 2009
Date Written: October 17, 2008
We develop a theory of self-regulation based on goal setting for an agent with present-biased preferences. Preferences are assumed to be reference-dependent and exhibit loss aversion, as in prospect theory. The reference point is determined endogenously as an optimal self-sustaining goal. The interaction between hyperbolic discounting and loss aversion makes goals a credible and effective instrument for self-regulation. This is an entirely internal commitment device that does not rely on reputation building. We show that in some cases it is optimal to engage in indulgent behavior, and sometimes it is optimal to set seemingly dysfunctional goals. Finally, we derive a condition under which proximal (short term) goals are better than distal (long term) goals. Our results provide an implicit evolutionary rationale for the existence of loss aversion as a means of self-control.
Keywords: self-regulation, goals, time inconsistency, loss aversion, indulgence, compulsiveness, proximal and distal
JEL Classification: D00, D80, D90
Suggested Citation: Suggested Citation