Question

How much should someone with timeinconsistent preferences be willing to pay for Clocky? [LO 23.3] a. Nothing, because a regular alarm will work just as well. b. Something, because Clocky increases his utility by getting him up at the right time. c. You'd have to pay him to use Clocky, because his utility is decreased by having to get out of bed and search around to shut off the alarm.

Short answer

b. Something, because Clocky increases utility by ensuring timely wakeup.

Step-by-step solution

Identify Time-Inconsistent Preferences

Time-inconsistent preferences occur when a person makes a plan for the future but later changes their plan due to a change in preferences. This often leads to procrastination or failing to follow through with plans.

Understand Clocky's Functionality

Clocky is an alarm clock that forces the person to physically get out of bed to turn it off, making it a solution for those who may fall back asleep easily.

Assess Clocky in Terms of Utility

Utility refers to the satisfaction or benefit a person receives from a good or service. Clocky can provide utility by ensuring the person gets up on time, which adds value for time-inconsistent individuals.

Evaluate How Clocky Addresses Time-Inconsistency

For someone with time-inconsistent preferences, Clocky is valuable because it helps overcome the tendency to stay in bed when a regular alarm might not suffice. This added assurance of waking up on time increases overall utility.

Conclusion Based on Utility Increase

Since Clocky increases the person's utility by helping them wake up on time despite their time-inconsistency, the person should be willing to pay something for it. Option B is the correct choice.

Key concepts

Utility in Economics

Understanding utility is crucial when examining why someone might purchase a product like Clocky. Utility in economics refers to the satisfaction or benefit a person gains from consuming a product or service. In the context of Clocky, utility is derived from the assurance of waking up on time. This is particularly beneficial for individuals with time-inconsistent preferences.
Utility isn't always about direct pleasure. It can also come from removing a negative consequence, such as being late to work or missing an important meeting. In this case, Clocky offers additional utility compared to a traditional alarm clock, as it effectively combats the inertia of wanting to stay in bed.

• An increase in utility means individuals are willing to pay something for it.
• For time-inconsistent people, this means paying for Clocky as it helps them stick to their plans.
• Utility can also embody peace of mind knowing that one will get up on time.

Hence, in terms of economic utility, purchasing Clocky can be seen as a worthwhile investment for those who struggle to wake up with standard alarms.

Behavioral Economics

Behavioral economics blends insights from psychology with economic theory to understand how people make decisions. Traditional economics assumes people are rational and always make decisions that maximize their utility. However, behavioral economics recognizes that people often act irrationally due to various cognitive biases and emotions.
Time-inconsistent preferences are a classic example studied within behavioral economics. It's a behavior where individuals' preferences change over time even against their own long-term best interests. For instance, someone might set an early alarm intending to wake up, but when the morning comes, they hit snooze repeatedly. This is because immediate gratification (staying in a comfortable bed) outweighs long-term benefits (starting the day on time).

• Clocky acts as a behavioral tool by countering this time-inconsistency.
• It "nudges" the individual to follow through on their initial plan to get up early.
• This aligns with the insights from behavioral economics, where adjusting the environment or using commitment devices can alter behaviors.

So, Clocky is a practical application of behavioral economics designed to support better decision-making by overcoming irrational tendencies.

Decision Making

Decision making involves choosing between different options based on the perceived benefits and costs. For people with time-inconsistent preferences, decision-making often becomes a battle between immediate desires and long-term goals. This concept is crucial in understanding why Clocky might be appealing.
Effective decision making isn't just about strategic thinking; it's also about designing environments that facilitate better choices. Clocky does just this by physically forcing the user to get out of bed, making it easier to stick to their decision to wake up on time.

• Individuals with time-inconsistent preferences often need help sticking to their initial decisions.
• Products like Clocky support their decision-making process by removing temptations to go back to bed.
• This fits within the economic view which suggests creating systems that help mitigate poor decision-making habits.

In conclusion, incorporating tools like Clocky can lead to more effective decision-making, equipping individuals to overcome the imbalance between their short-term impulses and long-term goals.