Sunday, December 9, 2007

Time Inconsistency, Parking Tickets and Health Care

The New Haven police gifted me a parking ticket a couple weeks back. The payment scheme for the ticket works something like this: it's $15 if you pay it within two weeks or so, $30 if within four weeks and $60 thereafter. I still haven't paid my ticket, so I am looking at about $30 right now.

Am I just completely insane? Why didn't I pay my ticket on time? I could have saved at least 15 bucks. Well, as it turns out, I always did (and still do) intend to pay it sooner rather than later. But getting an envelope, writing a check and sending the thing out was (and is) kind of annoying process to me. Every day I would say, "I'll do it tomorrow."

This is what is called time (or dynamic) inconsistency. The basic idea is that one's current self and one's future self (say tomorrow, or next month) have differing ideas on what actions should be taken (present or future). This is more than a theoretical construct: its a pretty big deal in health economics. An example (taken from the above linked wikipedia page):

Each day smokers face a dynamic inconsistency: their best plan is to enjoy smoking today, but to quit tomorrow in order to get health benefits. However, the next day, the plan is the same; enjoy smoking today and quit tomorrow. This goes on, and they never give up, even though they plan to, hence the inconsistency.

You can easily see how this behavior is important in understanding other health behaviors, such as dieting and other weight loss efforts or perhaps even going to the doctor to get some anomaly checked.

If time inconsistency is a strong barrier to self-motivated health efforts, how does one get around this? Yale economist Dean Karlan and law professor Ian Ayres think they have an answer. The two have recently started a company called StickK. Here is the basic idea:

The company will have a Web site offering individuals hoping to reach a goal — anything from sticking to a diet to learning to ride a unicycle — legally binding contracts where they will pay a set dollar amount to charity if they fail in their endeavor.

The author of the book "The Undercover Economist," Tim Harford, is testing out StickK's methodology. He has paid a $1,000 so-called contract bond to the company, and has promised to donate 10% of this deposit to charity if he fails to complete 200 push-ups and 200 sit-ups every week.

"When I signed up to do this, I thought to myself, the contract bond isn't going to matter at all; what's relevant is that I've made the psychological commitment to do these press-ups and sit-ups," he said. "I was completely wrong. There's absolutely no way I would have done these press-ups and sit-ups for the past six weeks had it not been for the commitment bond."

I'm really curious to see a) how many people choose to enter binding contracts and b) how effective these are for the average consumer.

In the meantime, I think I'll pay my parking ticket...tomorrow.

12 comments:

Valli said...
This comment has been removed by the author.
Valli said...

from a note on facebook:

I, XX, pledge to be a comfortable size _ (at Express) by the date of February X, XXXX. That failing, I pledge to lose 10 pounds, weighing in at ___lbs., by the date of February X, XXXX.
I, XXX, pledge to lose 10 pounds, weighing in at ___ lbs., by the date of XXXX.

We, the aforementioned, pledge to enforce and encourage one another’s goals by the means specified herein:
• Encouraging consumption of water (8 glasses a day) using Facebook, text, and phone messages. Failing that, I will send a mail treat to the other for that day.
• If I (XX) consume sweets or junk food, I will owe XXX $1.00 that day.
• I (XXX) will spend 10 minutes on an ab workout daily. For a missed workout detected by XX, I will pay XX $1.00.
• I (XXX) will do 3 25-minute cardiovascular workouts weekly. Failing that, I will type up one worksheet for that week for XX.
• I (XXX) will do four 45 minute cardiovascular workouts weekly. Failing that, I will pay XX $1.00 for each missed workout.
• I (XXX) will do six (6) three-set strength training exercises thrice a week. Failing that, I will send a care package to XX for that week.

These stipulations only hold for circumstances in which one party catches the other party having failed to fulfill the requirements specified above.
If either party defaults or forfeits the terms of this contract:
XX will purchase a round-trip airline ticket from NY to Chicago.
XXX will purchase a Shu Uemura product of XX's choice for her.
Upon completion of the aforementioned contract, I (XX) will treat myself to a day of pampering, complete with massage, haircut, mani/pedi, and a new outfit.
Upon completion of the aforementioned contract, I (XXX) will treat myself to a new outfit.

If both of us have maintained our weight by July 2008, XXXX will reward us with a nice surprise.

how does the website enforce the contract?

Atheendar said...

Valli,

From the Sun article:

"In December, customers will be able to decide on an amount to put up as collateral if they fail in their goals, and will give StickK their credit card numbers, which will be charged if they miss their objectives. There will also be a verification system, such as a designated friend or gym that will chart customers' progress."

I don't know how exactly the verification will work though After all, you might pick a friend that will help you cheat. But I think for the most part a) your friends, coworkers or gym probably want to see you hit your goal, b) only the really serious ones will self-select into a commitment device.

Thanks for the facebook link. This is great! Nice to see such contracts being made all by themselves between interested parties. It seems like the added benefit of this company is to essentially match everyone who wants to commit to someone under a binding situation, with that "someone" being their future selves. The company gets around time inconsistency by guaranteeing binding and reducing the cost of finding a binding situation.

Noor said...

you can pay st. louis parking tickets online. problem solved! =).

James said...

Noor, Atheen lives in New Haven. Duh.

Noor said...

that's why he should live in st. louis! we are smart enough to actually solve the problem, while the Yalies will have conferences and publish papers on the problem, but never solve it. =).

Atheendar said...

Noor,

You bring up a good point. The cause of the delay in my paying up can be attributed to two factors. I spent most of the post talking about time inconsistency, but I also alluded to another reason (which I think is slightly less important in my case) which stems from more standard neoclassical economics: the cost of failing to pay on time apparently did not outweigh opportunity and disutility costs associated with going through the whole stupid process.

The St Louis online program really hits the second reasons. It sufficiently lowers costs associated with going through the process of payment...I think in such a regime, I would have paid up immediately. However, I am not sure what the online payment does for time inconsistency. I think it does get at it: after all, you could argue that smokers are less likely to put quitting off till tomorrow under a regime with NRTs than one where its cold turkey or nothing at all.

An interesting question: does the city of New Haven exploit heterogeneity in opportunity costs and time inconsistency to make more money? Hence the sliding scale? I'm guessing that mail/in person payments are more expensive to administer than online payments. If online payments induce people to pay faster (and therefore, less) are savings in administrative costs completely washed out?

-Atheen

Noor said...

i'm a fourth year, and i don't care. :)

Anu said...

I've been meaning to leave a comment for a long time, but what pushed me over the time inconsistency edge was the fact that I love to challenge theories :-) So I accomplished this without having to sign a legal binding contract....

Anupama said...

so many people pay monthly payments to fitness centers, isn't that a binding contract?
Loosing money or binding will work for certain time but eventually you have to get inner drive to do things.
I guess eventually you get used to loosing money.

Anonymous said...

I think this commitment device is different than blowing your money on a gym or weight loss plan. With those things, you pay up front and then the effort is used to put in. The membership is a sunk cost, money you've lost regardless of whether you lose weight or not. With the commitment device you have the chance of getting the money back.

I guess though, if you are used to losing money from lots of experiences with gym memberships maybe you won't work as hard to get the money back? Or maybe the fact that your money goes to charity will make you less vigilant about meeting your goals.

mentormatt8 said...

Interesting idea about time inconsistencies. So should I pay my parking ticket today? Me and 10 others got it in one afternoon on this beautiful beach.

http://annoyingparkingticket.blogspot.com