Anticipation and Time: The Greatest Warriors of Decisions?
What is the nature of time? Not the space-time of general relativity, but the time we perceive. Which factors induce us to choose $100 today over $200 in a year? Is it the desire for immediate gratification? If so, why do we prefer to store a bottle of expensive champagne instead of consuming it right away? These are some of the questions that will be answered in this blog.
Of the various assumptions underlying economic analysis of intertemporal choice (choices differing in payoffs and time), perhaps, the assumption of preference for today over tomorrow is the most widespread and non-controversial one. It makes logical sense to appraise more value to $100 today compared to $200 at a later time, since we do not know what goods and services can be bought next year with that amount. Our short-term preference for positive events bespeaks that we are maximizing our utility through the elimination of uncertainty. Likewise, we have a long-term preference for events incurring us costs, i.e. preferring paying $150 in 1 year over $100 today. However, it requires little effort to think of examples of behaviour in which the converse is apparent. The pleasurable deferral of a vacation, the speeding up of a dental appointment, and the prolonged storage of wines are all instances of this phenomenon. Therefore, the traditional economics approach misses an imperative element of intertemporal choices: anticipation of future events.
Anticipation in the Form of Present Utility
It is unequivocally correct that individuals, in their choices, attempt to attain the highest utility. However, the key is to understand that the sensation of the present is affected by the anticipation of the future. We often get positive feelings from anticipating an imminent event. In an experiment conducted by renowned behavioural economist, George Loewenstein, subjects were asked to specify the amount that they would pay now to obtain or avoid each of five outcomes, which were further grouped into time delays. The outcomes were: (1) obtain four dollars; (2) avoid losing four dollars; (3) avoid losing one thousand dollars; (4) avoid receiving a non-lethal 110-volt electric shock; and (5) obtain a kiss from the movie star of your choice. Time delays were: (1) immediate; (2) in twenty-four hours; (3) in three days; (4) in one year; and (5) in ten years. The subjects were also told that the outcomes were certain to occur at the designated time. The results are illustrated in the following graph.
It can be inferred that the two non-monetary items, the kiss and the shock, exhibit unusual patterns. The short-term preference implies that individuals would prefer to obtain positive outcomes as soon as possible. This prediction, however, is contradicted by the kiss item, for which, the highest value appraised to occurrence was 3 days. In like manner, the economist assumption asserts that negative outcomes are delayed whenever possible. Yet, in the shock outcome, subjects preferred to pay slightly more to avoid a shock that was delayed by 3 hours than 3 days.
Explaining the Phenomenon
The ostensibly contradictory phenomenon becomes unambiguous if we consider the affect of anticipation of future events on the present utility. In the experiment, the most valued time for the kiss was three days, as there was also a value from expecting the event to occur. Individuals actually increased their inner pleasure through savouring utility of both the event and the expectation of the event. Likewise, in the shock case, a negative utility arises from expectation of the event, exacerbating the total pain felt by the individual. These negative anticipatory feelings can be acute; researchers have found that in some cases the anticipation of an event may be worse than the event itself.
Evolutionary biology traces the source of this tendency to the aspects of innate mammalian system. In the acknowledged fight-or-flight response system that prepares the body to stay and fight or to flee, negative anticipation of a future event induces people to take the flight response. However, in the cases which the drastic future event cannot be avoided, the individual is propelled to fight now, as in the experiment subjects preferred the shock now instead of having it in three days.
In essence, the determinants of intertemporal choices are not limited to time preferences, and the feelings associated with expectation of a future event further affects individual choices. As the avant-garde economist Alfred Marshall remarked, “When calculating the rate at which a future benefit is discounted, we must be careful to make allowance for the pleasures of expectation.”
Caplin, A. and Leahy, J. (2001). Psychological Expected Utility Theory and Anticipatory Feelings. The Quarterly Journal of Economies, 116(1), pp. 55-79.
Loewenstein, G. F. and Prelec, D. (1992). Anomalies in intertemporal choice: Evidence and Interpretation. The Quarterly Journal of Economies,107(2), pp. 573-597.
Loewenstein, G. F., Weber, U. E., Hsee, K. C. and Welch, N. (2001). Risk as Feelings. Psychological Bulletin, 127(2), pp. 267-285.
Ortony, A., Clore, G. and Collins, A. (1988). The Cognitive Structure of the Emotions. Cambridge: Cambridge University Press.