Question

In an article in the Quarterly Journal of Economics, Ted O'Donoghue and Matthew Rabin made the following observation: "People have self-control problems caused by a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate." What do they mean by people's "long-run selves"? Give two examples of people pursuing immediate gratification that their longrun selves would not appreciate.

Short answer

The term 'long-run selves' implies a future perspective or version of oneself that reaps the outcomes of present decisions, with respect to long-term goals and consequences. Two examples of immediate gratification not appreciated by long-run selves could be unhealthy eating habits and not saving money for the future. In both cases, short-term pleasure might result in long-term disadvantages such as potential health issues and inadequate savings.

Step-by-step solution

Understand the concept of 'long-run selves'

The term 'long-run selves' typically refers to the future perspective or version of oneself. It's about the self who reaps the outcomes of current decisions, taking into account long-term goals and consequences. When these economists talk about 'long-run selves', they imply that individuals often make choices today that can potentially harm them in the future. This disparity between short-term and long-term preferences reveals a self-control issue.

Give the first example

One common example to illustrate this could be unhealthy eating habits. Someone might choose to eat fast food for lunch because it's convenient and tasty, pursuing immediate gratification. However, their long-run self, who prioritizes health and longevity, wouldn't appreciate this choice because a consistent pattern of such behavior could lead to health issues including obesity, heart disease, or diabetes.

Give the second example

Another example is choosing to spend money on non-essential items or entertainment instead of saving for the future. The immediate gratification comes from the enjoyment of a new purchase or experience. However, in the long run, this kind of behavior could result in inadequate savings for emergencies, retirement, or larger life goals.

Key concepts

Understanding Immediate Gratification

Immediate gratification refers to the desire to experience pleasure or fulfillment without delay or deferment. In terms of economics, this concept involves consumers choosing to receive a benefit right now rather than waiting for a potentially larger or more enduring benefit in the future.

For instance, when someone impulsively buys a luxury item on credit rather than saving the money for a more significant future purchase, they are opting for immediate gratification. This choice might feel satisfying in the short term, but it can lead to financial strain due to accumulating interest and a decreased ability to afford future expenses.

Another example is procrastination, where an individual might choose to watch a movie instead of studying for an exam. The enjoyment is immediate, but the long-term consequence could be poor academic performance, which could impact career opportunities. These choices emphasize the human tendency to prioritize present comfort over future benefits, which economic models try to factor into understanding consumer behavior.

The Concept of Long-Run Selves

Our 'long-run selves' represent our future identity, projecting our current decisions' long-term outcomes and how they align with our ultimate goals and well-being. The concept plays a crucial role in examining the implications of economic choices over time.

When individuals prioritize their long-run selves, they make decisions that may require present sacrifices but offer significant future payoffs. For example, investing in education may mean foregoing immediate earnings by not working full-time. However, the increased knowledge and qualifications can lead to better job opportunities and higher lifetime earnings.

Conversely, when individuals neglect their long-run selves, they might indulge in behaviors like overspending or neglecting health, which can result in future financial or physical hardships. Economic models must account for how individuals weigh their short-term desires against their long-term well-being when predicting economic decision-making.

Economic Decision-Making

Economic decision-making is the process by which individuals, households, firms, and governments make choices about the allocation of resources. Self-control plays a pivotal role in this process, as it involves evaluating the costs and benefits associated with different courses of action.

A key component in economic decision-making is the trade-off between present consumption and future savings. Economists use tools like present value and discount rates to model how individuals value future benefits compared to immediate ones. High discount rates indicate a strong preference for immediate rewards, often leading to choices that satisfy short-term urges, such as impulsive shopping or indulgent eating habits.

Understanding these concepts helps explain why people might overconsume resources or fail to invest in their futures, despite knowing the potential negative consequences. Economic policies and personal financial planning often try to mitigate these tendencies, encouraging actions that favor long-term benefits over short-term gains.