Risk, Delay, and Convex Self-Control Costs

51 Pages Posted: 7 Nov 2010

See all articles by Drew Fudenberg

Drew Fudenberg

Massachusetts Institute of Technology (MIT)

David K. Levine

Washington University in St. Louis - Department of Economics; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Date Written: November 5, 2010

Abstract

We develop a dual-self model of self-control that is compatible with modern dynamic macroeconomic theory and evidence. We show that a convex cost of self-control explains a wide range of behavioral anomalies concerning risk, including the Allais paradox, and also explains the observed interaction between risk and delay. We calibrate the model to obtain a quantitative fit. We find that most of the data can be explained with subjective interest rates in the range of 1-7%, short-run relative risk aversion of about 2, and a time horizon of one day for the short-run self.

Suggested Citation

Fudenberg, Drew and Levine, David K., Risk, Delay, and Convex Self-Control Costs (November 5, 2010). Available at SSRN: https://ssrn.com/abstract=1703603 or http://dx.doi.org/10.2139/ssrn.1703603

Drew Fudenberg (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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Cambridge, MA 02139-4307
United States

David K. Levine

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://www.dklevine.com

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

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