Undercover Economist

January 3, 2014 3:33 pm

How can we outwit our lazier selves?

‘Be careful what you resolve to do in 2014 – and how irrevocably you resolve it with commitment strategies’
GC timebomb©Raymond Biesinger

What do the cold war, expiring gift vouchers, the euro and New Year’s resolutions have in common?

A hunt for the link begins with Thomas Schelling, the only person in history to have run war games for Henry Kissinger, won a Nobel memorial prize in economics and served as a script consultant for Stanley Kubrick’s Dr Strangelove.

The film featured the Soviet doomsday device: “When it is detonated, it will produce enough lethal radioactive fallout so that within 10 months, the surface of the earth will be as dead as the moon!” The point about the doomsday machine is that no sane person would ever trigger it, so it is set up to explode automatically in the event of the war. It is thus the perfect deterrent.

Strategic commitments need not be so cartoonish: a public declaration can serve as well, by making it awkward to retreat. Consider John F. Kennedy’s televised address from the Oval Office in which he declared that West Berlin would be defended, and “an attack upon that city will be regarded as an attack upon us all”. Schelling, whose ideas also informed Kennedy, was widely regarded as the authority in the use of such commitments.

In the 1970s, Schelling turned his attention to what we would now call behavioural economics. He was fascinated by what he described as “the intimate contest for self-command” – our efforts to quit smoking or learn Mandarin in the face of stubborn inertia. And Schelling felt that commitment strategies could help us outwit our lazier selves.

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The New Year’s resolution can be supplemented with a commitment strategy: paying in advance for a year’s gym membership or betting with friends that we’ll stop smoking. Announcing on Facebook that we’ll be running a marathon in April isn’t quite JFK, but the declaration serves the same purpose.

Commitment devices can work but Schelling raised two awkward questions. The first is, whose side should we take in the intimate contest for self-command? If part of me wants to quit smoking and part of me doesn’t, most of us hope the quitter will win. People tend to eat too much, exercise too little and not save for retirement. But some people eat too little, exercise too much and hoard when they should be spending. It is possible to worry too much about the future.

A second challenge from Schelling: what if the commitment backfires? Many people pre-pay their gym membership as an attempt at strategic commitment, and then don’t go to the gym. This is the worst of both worlds: we fail to keep our resolutions and, in addition, pay the costs of the failed commitment. Spoiler alert: the doomsday machine in Dr Strangelove does not deliver the hoped-for permanent peace.

Some research by Suzanne Shu and Ayelet Gneezy, professors of marketing, suggests that commitment strategies may work with Christmas gift vouchers: a voucher with an imminent expiry date induces urgency and is more likely to be spent than one that expires later. (Similarly: tourists see sights that the locals never get round to visiting.) And yet in Shu and Gneezy’s study, the majority of vouchers expire unused. This is hardly an unmitigated success.

Commitment strategies are now cool in macroeconomic policy. An independent central bank with an inflation-busting mandate is a commitment strategy. So is a fiscal watchdog such as the Office for Budget Responsibility. Bank of England governor Mark Carney’s “forward guidance” is too. But the most ambitious attempt at macroeconomic commitment was the euro. It was a doomsday machine in more ways than one.

So be careful what you resolve to do in 2014 – and how irrevocably you resolve it.

‘The Undercover Economist Strikes Back’, by Tim Harford, is published by Little, Brown

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