Discussion Paper

No. 2015-19 | March 11, 2015
Youth and Inexperience: Dynamic Inconsistency Among Emerging Adults

Abstract

Why do some people think they will behave differently in the future? Building on research on dynamic inconsistency and age related preferences, this paper introduces the concept that inconsistent intertemporal preferences are directly related to age. In previous studies, standard socioeconomic variables such as age have had mixed results in predicting hyperbolic discounting (a behavior that consists of impatience now but projected patience in the future). By incorporating both demographic and behavioral variables, a clearer picture emerges. The findings from observations of a large sample of college graduates indicate that emerging adults are more likely to exhibit hyperbolic discounting behavior than adults over the age of 30. Among emerging adult respondents, lower incomes and more naïve self-assessments are determinants of hyperbolic discounting behavior. Recognizing demographic trends is critical since studies show that hyperbolic discounting affects financial and planning decisions and that specially designed tools may help hyperbolic discounters follow through with plans (Ashraf et. al., Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines, 2006).

JEL Classification:

D1, D9, J1

Assessment

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Links

Cite As

Brian Gibbons and Julia Paxton (2015). Youth and Inexperience: Dynamic Inconsistency Among Emerging Adults. Economics Discussion Papers, No 2015-19, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2015-19


Comments and Questions


Anonymous - Referee Report 1
June 25, 2015 - 08:35

see attached file


Julia Pagan - Response to referee report
July 01, 2015 - 17:40

Thank you for your comments and insights into our paper. The omission of Strotz’ 1955 work on myopia and finite planning horizons into the paper is an oversight as it would definitely contribute to the discussion. While all empirical tests of hyperbolic discounting face the issue of a finite time ...[more]

... horizon, it may be a particularly relevant issue when contrasting younger and older respondents who may adopt different decision rules at different periods in their lives. Interestingly, the data show that a larger percentage of adults are consistently impatient both now and in 6-7 months compared to the group of emerging adults which could fit with the finite time horizon argument. This explanation of why age may be a determinant of time inconsistency is provocative and will be incorporated into the discussion, although this particular dataset is ill-equipped to rigorously test for it. The econometric model of the determinants of time inconsistency use well established conventions for identifying hyperbolic discounting. Although the original intention of the paper was to highlight a new empirical insight about age and hyperbolic discounting, a more fully elaborated theoretical model can easily be incorporated into the paper.