Behavioural economics research has pointed to the importance of market inefficiencies, framing, heuristics and hyperbolic discounting. Empirically, behavioural economics has been shown to predict patterns of consumer behaviour, exercise patterns and substance addiction. In this article, I discuss the ways in which our growing understanding of behavioural economics has shaped the development of public policies. I conclude with six pieces of advice for behavioural policymakers.

The two most influential models in delay discounting research have been the exponential (E) and hyperbolic (H) models. We develop a new methodology to design binary choice questions such that exponential and hyperbolic discount rates can be purposefully manipulated to make their rate parameters orthogonal (Pearson’s R = 0), negatively correlated (R = –1), positively correlated (R = +1), or to hold one rate constant while allowing the other to vary. Then we extend the method to similarly contrast different versions of the hyperboloid model. The arithmetic discounting model (A), which is based on differences between present and future rewards rather than their ratios, may easily be made orthogonal to any other pair of models. Our procedure makes it possible to design choice stimuli that precisely vary the relationship between different discount rates. However, the additional control over the correlation between different discount rate parameters may require the researcher to either restrict the range that those rate parameters can take, or to expand the range of times the participant must wait for future rewards.

Doyle’s (2013) theoretical survey of discount functions criticizes two parametric families abbreviated as CRDI and CADI families. We show that Doyle’s criticisms are based on a mathematical mistake and are incorrect.

The low demand for immediate annuities at retirement has been a long-standing puzzle. We show that a hyperbolic discount model can explain this behaviour and results in the attractiveness of long-term deferred annuities. With a set of benchmark assumptions, we find that retirees would be willing to pay a much higher price than the actuarial fair price for annuities with longer deferred periods. Moreover, if governments were to introduce a pre-commitment device which requires pensioners to make annuitisation decisions around 10 years before retirement, the take up rate of annuities could become higher.

This paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

The analysis of regulations affecting addictive or habitual goods has drawn considerable controversy. Some studies have suggested that such regulations have only small welfare benefits, as consumers value these goods despite health benefits from quitting, while other studies suggest that information or behavioral problems make existing consumption decisions a poor guide to welfare evaluation. We examine potential utility offsets to health benefits of regulations affecting addictive or habitual goods theoretically and empirically. Our analysis focuses on individuals who consume these goods only, ignoring other social costs and benefits. Theoretically, we show the importance of several factors including: money saved in addition to health improvements; differentiating steady-state utility losses from short-term withdrawal costs; lack of utility loss for people dissuaded from starting to consume the good; and accounting for utility consequences of explicit or implicit cost increases. Our empirical analysis considers regulations that affect smoking. To measure the welfare cost of smoking cessation, we divide the population into those with more and less rational smoking behavior and use the valuation of smoking from more rational smokers to impute values of losses for less rational smokers. Our results show that the utility cost of smoking cessation is small relative to the health gains in people for whom withdrawal costs are the main utility loss of quitting, and even among people who have some ongoing loss, the utility offsets represent 20%–25% of the health gains. While marginal smokers induced to quit by regulations can be expected to have low or no steady-state loss, even this higher estimate is far below prevailing estimates of the utility cost of smoking used by the Food and Drug Administration and other analysts.

This paper introduces the concepts of amount and speed of a discounting procedure in order to generate well-characterized families of procedures for use in social project evaluation. Exponential discounting sequesters the concepts of amount and speed into a single parameter that needs to be disaggregated in order to characterize nonconstant rate procedures. The inverse of the present value of a unit stream of benefits provides a natural measure of the amount a procedure discounts the future. We propose geometrical and time horizon based measures of how rapidly a discounting procedure acquires its ultimate present value, and we prove these to be the same. This provides an unambiguous measure of the speed of discounting, a measure whose values lie between 0 (slow) and 2 (fast). Exponential discounting has a speed of 1. A commonly proposed approach to aggregating individual discounting procedures into a social one for project evaluation averages the individual discount functions. We point to serious shortcoming with this approach and propose an alternative for which the amount and time horizon of the social procedure are the averages of the amounts and time horizons of the individual procedures. We further show that the social procedure will in general be slower than the average of the speeds of the individual procedures. For potential applications in social project evaluation we characterize three families of two-parameter discounting procedures – hyperbolic, gamma, and Weibull – in terms of their discount functions, their discount rate functions, their amounts, their speeds and their time horizons. (The appendix characterizes additional families, including the quasi-hyperbolic one.) A one parameter version of hyperbolic discounting, d(t) = (1+rt)-2, has amount r and speed 0, and this procedure is our candidate for use in social project evaluation, although additional empirical work will be needed to fully justify a one-parameter simplification of more general procedures.

Behavioral science has long been puzzled by the experience of temptation, the resulting impulsiveness, and the variably successful control of this impulsiveness. In conventional theories, a governing faculty like the ego evaluates future choices consistently over time, discounting their value for delay exponentially, that is, by a constant rate; impulses arise when this ego is confronted by a conditioned appetite. Breakdown of Will (Ainslie 2001) presents evidence that contradicts this model. Both people and nonhuman animals spontaneously discount the value of expected events in a curve where value is divided approximately by expected delay, a hyperbolic form that is more bowed than the rational, exponential curve.

With hyperbolic discounting, options that pay off quickly will be temporarily preferred to richer but slower-paying alternatives, a phenomenon that, over periods from minutes to days, can account for impulsive behaviors, and over periods of fractional seconds can account for involuntary behaviors. Contradictory reward-getting processes can in effect bargain with each other, and stable preferences can be established by the perception of recurrent choices as test cases (precedents) in recurrent intertemporal prisoner's dilemmas. The resulting motivational pattern resembles traditional descriptions of the will, as well as of compulsive phenomena that can now be seen as side-effects of will: over-concern with precedent, intractable but circumscribed failures of self-control, a motivated (“dynamic”) unconscious, and an inability to exploit emotional rewards. Hyperbolic curves also suggest a means of reducing classical conditioning to motivated choice, the last necessary step for modeling many involuntary processes like emotion and appetite as reward-seeking behaviors; such modeling, in turn, provides a rationale for empathic reward and the “construction” of reality.