What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.
An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.
Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.
Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.
People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.
There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.
If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.
Showing posts with label psychology. Show all posts
Showing posts with label psychology. Show all posts
Wednesday, February 15, 2012
Sunday, January 1, 2012
I Have No New Years Resolutions.
The New Year is a nice time, symbolically, to make a big change in life but practically it almost never works out that way. From a Boston Globe article, I learned that 80% of New Years resolutions are broken. Frankly, I'm surprised that as many as 20% are accomplished! People don't change much on the eve of December 31 to the morning of January 1 (perhaps except for the addition of a hangover) so I suspect much of the 20% accomplished are trivial ("remember to call my mom on her birthday this year") and require single actions, not sustained effort.
Resolutions are puzzling from both an economic and psychological perspective. To an economist, there's no reason why one day should be intrinsically more favorable than another to make a positive life change. If drinking less or exercising more would be a good idea, why wait until January 1st to start doing it? On the other hand, a psychologist might wonder why people set themselves up for failure so often. If 80% of resolutions ultimately amount to lying to yourself, why persist in encouraging such a mentally unhealthy activity?
The real question: if most resolutions would be good things to accomplish, why are people so bad at keeping them? It's easy to just dismiss New Years resolutions as "cheap talk" which people utter in order to sound socially acceptable and make themselves feel better, with no intent of actually following through. But, I think there's a little bit more to it than that.
In their book, Willpower: Rediscovering the Greatest Human Strength, Roy Baumeister and John Tierney offer a pretty good explanation for why New Years resolutions have such a short shelf-life. When someone creates a list of challenging self-improvement tasks, they are probably very optimistic about their future state of mind. But, realistically, we only have so much willpower to divide between different goals that require self-control. Willpower, in this regard, is somewhat like a muscle: when it is used lots in a short span of time it becomes fatigued, so later acts of self-control are more difficult. Creating a list of resolutions is like weight-lifting beyond the mind's capacity; it can't dedicate enough mental power to accomplish all the goals at once, so in the end none of them are met. As a result, creating a big list of dramatic changes is one of the least effective ways to actually modify your own behavior.
A better strategy is to choose one area that seems most important and focus on moderate improvements. Also like a muscle, willpower can become stronger when exercised. Picking reasonable goals gives a sense of accomplishment when they are completed, making it easier to stick with other changes in the future. In other words, build up capacity slowly to avoid a painful sprain of the willpower muscle (although if I stretch this analogy much further, I might suffer a tear in my credibility). Introducing the concept of willpower to economic thinking means we don't have to dismiss failed self-improvement projects as mere cheap talk, and can instead look more realistically at the human mind and its practical limitations.
Resolutions are puzzling from both an economic and psychological perspective. To an economist, there's no reason why one day should be intrinsically more favorable than another to make a positive life change. If drinking less or exercising more would be a good idea, why wait until January 1st to start doing it? On the other hand, a psychologist might wonder why people set themselves up for failure so often. If 80% of resolutions ultimately amount to lying to yourself, why persist in encouraging such a mentally unhealthy activity?
The real question: if most resolutions would be good things to accomplish, why are people so bad at keeping them? It's easy to just dismiss New Years resolutions as "cheap talk" which people utter in order to sound socially acceptable and make themselves feel better, with no intent of actually following through. But, I think there's a little bit more to it than that.
In their book, Willpower: Rediscovering the Greatest Human Strength, Roy Baumeister and John Tierney offer a pretty good explanation for why New Years resolutions have such a short shelf-life. When someone creates a list of challenging self-improvement tasks, they are probably very optimistic about their future state of mind. But, realistically, we only have so much willpower to divide between different goals that require self-control. Willpower, in this regard, is somewhat like a muscle: when it is used lots in a short span of time it becomes fatigued, so later acts of self-control are more difficult. Creating a list of resolutions is like weight-lifting beyond the mind's capacity; it can't dedicate enough mental power to accomplish all the goals at once, so in the end none of them are met. As a result, creating a big list of dramatic changes is one of the least effective ways to actually modify your own behavior.
A better strategy is to choose one area that seems most important and focus on moderate improvements. Also like a muscle, willpower can become stronger when exercised. Picking reasonable goals gives a sense of accomplishment when they are completed, making it easier to stick with other changes in the future. In other words, build up capacity slowly to avoid a painful sprain of the willpower muscle (although if I stretch this analogy much further, I might suffer a tear in my credibility). Introducing the concept of willpower to economic thinking means we don't have to dismiss failed self-improvement projects as mere cheap talk, and can instead look more realistically at the human mind and its practical limitations.
Tuesday, April 5, 2011
Real causes of debt are simple; debtors' explanations more complicated.
In my constant quest to find the pot of gold at the end of the Internet, I discovered this gem.
Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.
In short, there are two big problems with the statistics above.
1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.
2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.
I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.
If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.
Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!
Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.
In short, there are two big problems with the statistics above.
1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.
2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.
I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.
If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.
Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!
Sunday, August 1, 2010
Is Hoarding a disease, or just un-economic? Some advice for the cluttered.
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| Who doesn't need 70,000 empty beer cans? |
Economics does a lot of theorizing about consumption, and generally the assumption is that more = better. Presumably, a person will only buy something if it makes them happier or brings them some sort of utility. TV about hoarders is a case study in diminishing returns from possessions. In other words: the first 10 antique lamps and teddy bears were wonderful, but after there are 500 and you're sleeping on a single chair while living in fear of death by trash-alanche, then more stuff has become a dis-utility.
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