Impatience and savings.

• Author: Laibson, David
• Position: Research Summaries

When making decisions with immediate consequences, economic actors typically display a high degree of impatience. Consumers choose immediate pleasures instead of waiting a few days for much larger rewards. Consumers want "instant gratification."

However, people do not behave impatiently when they make decisions for the future. Few people plan to break their diets next week. Instead, people tend to splurge today and vow to exercise/diet/save tomorrow. From today's viewpoint, people prefer to act impatiently right now but to act patiently later.

Data from neuroscience experiments provide a potential explanation for these observations: short-run decisions engage different brain systems from long-run decisions. Using functional magnetic resonance imaging (fMRI), Samuel McClure, George Loewenstein, Jonathan D. Cohen, and I have shown that decisions that involve at least some short-run tradeoffs recruit both analytic and emotional brain systems, whereas decisions that only involve long-run tradeoffs primarily recruit analytic brain systems. (1) These findings suggest that people pursue instant gratification because the emotional brain system--the limbic system--values immediate rewards but only weakly responds to delayed rewards.

Whatever the underlying biological mechanism, the taste for instant gratification can be incorporated into models of human behavior. Several strands of my work have attempted to do this. Chris Harris and I have proposed models in which actors place a special premium on immediate pleasures. (2) I also have developed models that assume that people have biologically conditioned motivational states: when familiar cues are presented, consumers experience a drive to consume the goods that they consumed in the presence of those cues in the past. (3) For example, a cigarette smoker will urgently want a smoke when he enters his favorite bar (where he has smoked before).

The drive for immediate gratification has many empirical consequences that my coauthors and I have studied. Marios Angeletos, Andrea Repetto, Jeremy Tobacman, Stephen Weinberg, and I have run computational simulations of consumers with a taste for instant gratification (specifically, we studied quasi-hyperbolic discount functions). (4) We find that such consumers quickly spend whatever liquid wealth they have and are only able to save in illiquid assets. These consumers live from hand to mouth in their checking accounts, but hold large stocks of illiquid assets like home equity and defined contribution pension plans. When making long-run choices--for example, when deciding how to invest during flush times--these consumers buy illiquid assets that offer a high rate of return and pay out slowly over many decades. When making short-run decisions, however, these consumers are willing to pay a high price for immediate gratification.

Repetto, Tobacman, and I show that the taste for instant gratification explains why households hold illiquid assets and also frequently borrow with credit cards that involve relatively high interest rates. (5) We also estimate the strength of the taste for immediate gratification. (6) We find that consumers have a short-run...