TY - JOUR
T1 - Optimal time-inconsistent beliefs
T2 - Misplanning, procrastination, and commitment
AU - Brunnermeier, Markus K.
AU - Papakonstantinou, Filippos
AU - Parker, Jonathan A.
N1 - Funding Information:
M. K. Brunnermeier acknowledges financial support from the National Science Foundation [Grant SES 140-6139] and the Sloan Foundation.
Publisher Copyright:
© Copyright 2016 INFORMS.
PY - 2017/5
Y1 - 2017/5
N2 - We develop a structural theory of beliefs and behavior that relaxes the assumption of time consistency in beliefs. Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are that (i) optimal beliefs are optimistic and time inconsistent; (ii) people optimally exhibit the planning fallacy; (iii) incentives for rapid task completion make beliefs more optimistic and worsen work smoothing, whereas incentives for accurate duration prediction make beliefs less optimistic and improve work smoothing; (iv) without a commitment device, beliefs become less optimistic over time; and (v) in the presence of a commitment device, beliefs may become more optimistic over time, and people optimally exhibit preference for commitment.
AB - We develop a structural theory of beliefs and behavior that relaxes the assumption of time consistency in beliefs. Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are that (i) optimal beliefs are optimistic and time inconsistent; (ii) people optimally exhibit the planning fallacy; (iii) incentives for rapid task completion make beliefs more optimistic and worsen work smoothing, whereas incentives for accurate duration prediction make beliefs less optimistic and improve work smoothing; (iv) without a commitment device, beliefs become less optimistic over time; and (v) in the presence of a commitment device, beliefs may become more optimistic over time, and people optimally exhibit preference for commitment.
KW - Optimal beliefs
KW - Optimism
KW - Planning fallacy
KW - Preference for commitment
KW - Procrastination
KW - Time-inconsistent beliefs
KW - Time-inconsistent preferences
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U2 - 10.1287/mnsc.2015.2360
DO - 10.1287/mnsc.2015.2360
M3 - Article
AN - SCOPUS:85018783135
SN - 0025-1909
VL - 63
SP - 1318
EP - 1340
JO - Management Science
JF - Management Science
IS - 5
ER -