Motivation and emotion/Book/2023/Intertemporal choice

Intertemporal choice:
What are intertemporal choices and how can they be effectively negotiated?

Multimedia presentation (3 min)

Overview

Scenario 1 - The Smartphone Upgrade Dilemma Figure 1 - Red Pill, Blue Pill as a symbol of daily choices which have their own long term and short term outcomes and consequences. Imagine you're due for a smartphone upgrade, and you have two options: Option 1: Immediate gratification You can choose to upgrade to the latest smartphone model available today, which costs $500. This phone has all the latest features, a better camera, and faster performance. You've been eagerly waiting for this upgrade. Option 2: Delayed gratification Alternatively, you can choose to wait for six months before upgrading. During this time, you'll continue using your current smartphone, which is still functional but slightly outdated. After six months, the price of the latest model is expected to drop to $350. In this scenario, you're faced with an intertemporal choice. Option 1 provides immediate gratification with the latest smartphone, but it comes at a higher cost of $500. Option 2 offers delayed gratification and a more economical choice at $350, but you need to wait six months before enjoying the upgraded features. Your decision hinges on balancing the desire for immediate enjoyment and the potential financial savings from waiting. It's a common intertemporal choice scenario where you must weigh the trade-off between instant rewards and future benefits, considering your preferences and financial situation.

Intertemporal choice is the process of making decisions that involve trade-offs between outcomes at different points in time. It's the idea that individuals must choose between options that offer benefits or costs that are realised at different moments in the future. The problem is:

1. Emotional impulse versus delayed gratification
2. Instant reward versus future consequence
3. Spending habits and financial goals

Intertemporal choices are important for a number of reasons, including:

• Delayed Gratification
• Resource Allocation
• Risk and Uncertainty
• Investment and Consumption
• Planning for Retirement
• Opportunity Costs
• Personal and Social Welfare
• Behavioural Economics
• Debt and Credit
• Environmental Sustainability

Focus questions How do feelings affect our decisions about the future, and can we learn to control our emotions to make better choices? Here, we dive into the realm of affective forecasting and theories like the "hot-cold empathy gap." It's about understanding how our present emotions can cloud our judgment about future satisfaction, and how harnessing the power of emotional regulation might guide us toward choices that nurture our long-term emotional well-being. What common thinking errors impact our decisions about now versus later, and how can we use psychology to fix them? Picture the tussle between immediate rewards and cognitive biases like hyperbolic discounting or present bias. It's the tug-of-war between what we want now and what's better for us later. Through insights from behavioural economics and interventions like nudging, we explore how psychology serves as our compass for untangling these knots and making decisions that stand the test of time. How can psychology help us create tools and strategies for making choices that make us happier in the long run? Imagine a toolkit of strategies drawn from theories like self-regulation and implementation intentions. It's about using psychological science to craft interventions, apps, or practices that act as our guardians against impulsive choices. These tools are designed to keep us on the path toward our long-term goals, fostering motivation and emotional contentment along the way.

Cognitive psychology

Figure 4 - The Prefrontal Cortex (highlighted red) of the Human brain is vital to the decision making process.

What is cognitive psychology?

Cognitive psychology is a branch of psychology that focuses on the study of mental processes, including how people perceive, think, remember, learn, problem-solve, and make decisions. It explores the internal mental structures and processes that underlie human behaviour and cognition. Cognitive psychologists investigate a wide range of mental activities and phenomena to better understand how the mind works and how it influences human behaviour.

Key areas of interest within cognitive psychology include:

1. Memory
2. Perception
3. Language and Linguistics
4. Problem-Solving and Decision-Making
5. Learning and Cognitive Development
6. Attention and Cognitive Control
7. Cognitive Neuroscience
8. Cognitive Disorder

Cognitive psychology has contributed significantly to our understanding of human thought, problem-solving, and behaviour. It has practical applications in various fields, including education, clinical psychology, marketing, human-computer interaction, and artificial intelligence. Cognitive psychologists use experimental methods, computational modelling, and empirical research to advance our knowledge of mental processes and their implications for everyday life.

Cognitive psychology and intertemporal choice

Cognitive psychological theories play a pivotal role in understanding and explaining the intricacies of intertemporal choices, shedding light on how individuals make decisions that involve trade-offs between immediate rewards and future benefits. These theories offer valuable insights into the underlying cognitive processes and mechanisms that drive intertemporal decision-making.

At the heart of the correlation between cognitive psychology and intertemporal choices lies the concept of **delay discounting**. Cognitive psychology explores the mental processes that govern how individuals perceive, evaluate, and make decisions about rewards that are temporally distant. Cognitive theories, such as those related to information processing and decision-making, help elucidate the mechanisms behind this phenomenon.

Dual-Process Theory, a prominent cognitive theory, posits that decision-making involves two distinct systems: System 1, which is fast and intuitive, and System 2, which is slow and deliberative. In the context of intertemporal choices, System 1 may lead individuals to favor immediate rewards, driven by emotional and impulsive responses. System 2, on the other hand, encourages thoughtful and rational consideration of future consequences. This theory explains why individuals sometimes struggle to balance short-term desires with long-term goals and how cognitive processes interact in making these choices.

Another cognitive psychological theory that directly relates to intertemporal choices is prospect theory, which addresses how individuals evaluate and weigh potential gains and losses. Prospect theory suggests that people often exhibit risk aversion when faced with potential losses, preferring sure gains over risky ones. Applied to intertemporal choices, individuals may be more inclined to select immediate rewards to avoid the perceived loss of not receiving a reward sooner.

Furthermore, cognitive theories have uncovered various cognitive biases and heuristics that impact intertemporal choices. For example, the hyperbolic discounting model demonstrates that people heavily discount future rewards when the delay is short but become more patient as the delay lengthens. This temporal inconsistency can lead to impulsive decisions when immediate rewards are imminent.

Understanding these cognitive biases and heuristics is essential for developing interventions that mitigate their effects on decision-making. Psychological strategies and tools, such as commitment devices and goal-setting techniques, are designed based on cognitive principles to help individuals overcome the biases that may lead to suboptimal intertemporal choices.

In summary, cognitive psychological theories provide a comprehensive framework for dissecting the cognitive processes that underlie intertemporal choices. These theories illuminate the mechanisms that drive our propensity for immediate rewards and offer valuable insights for designing interventions to enhance future-oriented decision-making, ultimately helping individuals align their choices with their long-term goals and well-being.

Test yourself Choose the correct answer and click "Submit": Based on the information provided above, which of the following is NOT an intertemporal choice? Saving for Retirement Restaurant for Dinner Education Investment Healthy Eating Habits

Delay Discounting

Delay discounting is a fundamental concept in the realm of psychology and decision-making that plays a crucial role in understanding intertemporal choice. It refers to the phenomenon where individuals tend to assign less value to rewards or outcomes that are delayed in the future compared to those available immediately. In essence, it is the process of diminishing the perceived worth or desirability of a reward as the delay to its receipt increases. Delay discounting is a concept deeply rooted in human psychology and has significant implications for how individuals make choices that involve trade-offs between immediate and future outcomes.

To better grasp the concept of delay discounting, consider a classic example:

Scenario 2 - Now or Later Imagine you are offered the choice between receiving $100 today or receiving $150 one year from now. Delay discounting theory predicts that many people would prefer the immediate $100 over the delayed $150, even though the latter offers a higher monetary value. This preference for immediate rewards, often referred to as "present bias," highlights how delay discounting influences intertemporal choice.

The relationship between delay discounting and intertemporal choice is inherently intertwined. Intertemporal choice, in essence, involves making decisions between options that offer different outcomes at various points in time. These choices can range from simple everyday decisions like saving money, dieting, or studying (where the rewards are future-oriented) to more complex financial decisions, such as investing or retirement planning. In all of these scenarios, individuals must confront the challenge of delay discounting when deciding between immediate gratification and long-term benefits.

There are several key aspects of how delay discounting relates to intertemporal choice:

1. Time Preference: Delay discounting is a manifestation of an individual's time preference, which reflects their inclination toward immediate or delayed rewards. Some people may heavily discount future rewards, indicating a strong preference for immediate gratification, while others may exhibit lower discount rates, indicating a greater willingness to wait for larger, delayed rewards.
2. Impulsivity: High levels of delay discounting are often associated with impulsivity. Individuals who heavily discount future rewards are more likely to make impulsive decisions, prioritising short-term pleasures over long-term gains. This can have implications for various aspects of life, including financial stability, health, and personal relationships.
3. Self-Control: Delay discounting can be viewed as a measure of an individual's self-control. People with lower delay discount rates are generally better at delaying gratification and are more likely to make choices that lead to long-term benefits, such as saving money or maintaining a healthy lifestyle. In contrast, individuals with higher discount rates may struggle with self-control and find it challenging to make choices that require delaying immediate rewards.
4. Behavioural Economics: Behavioural economics, a field closely related to psychology, has extensively studied the effects of delay discounting on decision-making. Concepts such as hyperbolic discounting, which describes how people's preferences change as the delay to a reward shortens, have been developed to better understand and model the dynamics of intertemporal choice.
5. Intervention Strategies: Understanding delay discounting is critical because it informs the development of strategies and interventions aimed at helping individuals make more future-oriented decisions. Techniques like pre-commitment devices, where individuals make binding choices to limit access to immediate rewards, are designed to counteract the effects of delay discounting and promote better long-term decision-making.

Delay discounting is a central concept in psychology that plays a pivotal role in shaping intertemporal choices. It underscores the natural tendency of individuals to devalue future rewards in favour of immediate ones, a phenomenon that has significant implications for various aspects of life, including personal finance, health behaviours, and goal attainment. Recognising the influence of delay discounting on decision-making provides a foundation for developing strategies and interventions to help individuals make choices that align with their long-term goals and well-being.

Cognitive psychology and delay discounting

Cognitive psychology and delay discounting are two distinct yet interconnected concepts in the field of psychology, particularly when it comes to intertemporal decision-making. While both areas of study contribute to our understanding of human behaviour, they approach the issue of intertemporal choices from different perspectives and have unique implications.

Cognitive Psychology

Cognitive psychology is a broad subfield of psychology that focuses on the study of mental processes such as perception, memory, attention, and problem-solving. It is concerned with understanding how individuals acquire, process, and use information to make decisions and solve problems. In the context of intertemporal decision-making, cognitive psychology examines how individuals perceive and evaluate future rewards and costs. It explores the cognitive mechanisms that underlie our ability to plan for the future and make choices that involve trade-offs between immediate and delayed outcomes. One key aspect of cognitive psychology's contribution to understanding intertemporal choices is its emphasis on cognitive biases and heuristics. For example, research in this field has shown that individuals tend to have a present bias, meaning they often prefer smaller, immediate rewards over larger, delayed rewards. This can lead to suboptimal decision-making when it comes to long-term financial planning or health-related behaviours. Cognitive psychology also sheds light on the role of executive functions, such as impulse control and working memory, in intertemporal decision-making. These cognitive processes play a significant role in our ability to resist the temptation of immediate gratification and choose delayed rewards that are more beneficial in the long run.

Delay Discounting

Delay discounting, on the other hand, is a specific concept within the field of behavioural economics and decision-making psychology. It focuses on how individuals devalue or discount the subjective value of future rewards as a function of time. In other words, it examines how the perceived worth of a reward decreases as the delay to its receipt increases. Delay discounting is often operationalised through experimental tasks in which participants are asked to choose between smaller, immediate rewards and larger, delayed rewards. The rate at which individuals discount future rewards varies among individuals, and this variability is a central focus of delay discounting research. One of the key contributions of delay discounting to understanding intertemporal choices is its quantitative approach. Researchers use mathematical models to describe and predict how individuals discount future rewards, which allows for a precise characterisation of decision-making patterns.

Critical Contrast

The critical contrast between cognitive psychology and delay discounting lies in their primary focus and methodology. Cognitive psychology explores the cognitive processes, biases, and heuristics that influence intertemporal decision-making, emphasising the role of mental constructs in shaping choices. In contrast, delay discounting is primarily concerned with the quantitative modelling of how individuals discount future rewards, prioritising the measurement of temporal discount rates. Additionally, cognitive psychology often investigates the underlying mechanisms and cognitive strategies that individuals use to make intertemporal choices. It examines how cognitive factors, such as self-control and mental imagery, can be harnessed to improve decision-making in situations involving delayed rewards. Delay discounting, on the other hand, tends to focus more on the observed behavioural patterns and individual differences in discounting rates. While it provides valuable insights into the variability of intertemporal decision-making, it may not delve as deeply into the underlying cognitive processes driving these decisions.

In summary, cognitive psychology and delay discounting offer complementary perspectives on intertemporal decision-making. Cognitive psychology provides a richer understanding of the cognitive and motivational aspects of such decisions, while delay discounting offers a quantitative framework for characterising discounting rates and decision patterns. Both fields contribute to our comprehensive understanding of how individuals navigate choices that involve trade-offs between immediate and delayed rewards, shedding light on the complex interplay between cognition and behaviour.

Conclusion

Intertemporal choices refer to decisions that involve trade-offs between outcomes at different points in time. These choices can be challenging to negotiate, as they require individuals to balance immediate gratification with long-term goals. Here are some conclusions about how intertemporal choices can be effectively negotiated:

Time Preference Variation: People have different time preferences, which influence their intertemporal choices. Some individuals have a strong preference for immediate rewards, while others prioritise long-term benefits. Negotiating intertemporal choices effectively involves recognising and understanding your own time preference and those of others.

Self-Control Strategies: Self-control is essential for making effective intertemporal choices. Strategies like setting goals, creating incentives, and using willpower can help individuals delay immediate gratification in favour of long-term benefits. Self-control techniques can be negotiated with oneself to align behaviour with long-term goals.

Information and Education: Access to information and education can significantly impact intertemporal choices. When people are informed about the consequences of their decisions over time, they may be more likely to make choices that align with their long-term interests. Negotiating with oneself or others to gather and share relevant information can be beneficial.

Commitment Devices: Commitment devices are mechanisms that individuals use to constrain their future choices. These can include financial arrangements (e.g., saving money in a retirement account), technology tools (e.g., website blockers to reduce procrastination), or social commitments (e.g., accountability partners). Negotiating and implementing commitment devices can help individuals stick to their long-term plans.

Discounting and Future Value: People often discount the value of future rewards in favour of immediate gains. Effective negotiation of intertemporal choices may involve finding ways to reduce this discount rate or emphasise the future value of delayed rewards. Techniques like mental time travel or vividly imagining future outcomes can be helpful.

Emotional Regulation: Emotions can play a significant role in intertemporal choices. Negotiating with oneself or others may require managing emotions that can lead to impulsive decisions (e.g., fear, stress, or temptation). Strategies like mindfulness, stress reduction, and emotional regulation can be valuable in this context.

Social Influence: Social factors can impact intertemporal choices. Family members, friends, and colleagues can exert pressure or provide support for making certain decisions. Effective negotiation may involve seeking social support, sharing goals with others, or finding ways to mitigate social pressures that push for immediate gratification.

Trade-offs and Flexibility: Negotiating intertemporal choices often involves recognising that there are trade-offs between short-term and long-term benefits. Being flexible and open to adjusting decisions as circumstances change can be important. Effective negotiation sometimes requires revisiting and revising intertemporal choices over time.

In summary, effective negotiation of intertemporal choices involves understanding one's time preferences, employing self-control strategies, seeking information, using commitment devices, recognising the value of future rewards, managing emotions, leveraging social support, and being flexible in decision-making. The specific approach may vary from person to person and context to context, but a thoughtful and strategic approach can help individuals make choices that align with their long-term goals and values.

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External Links

• Individual differences in intertemporal choice (Frontiers)
• What is Intertemporal Choices (YouTube)