Matthew Rabin

Understanding Social Preferences with Simple Tests

Departures from self-interest in economic experiments have recently inspired models of “social preferences”. We design a range of simple experimental games that test these theories more directly than existing experiments. Our experiments show that subjects are more concerned with increasing social welfare—sacrificing to increase the payoffs for all recipients, especially low-payoff recipients—than with reducing differences in payoffs (as supposed in recent models). Subjects are also motivated by reciprocity: They withdraw willingness to sacrifice to achieve a fair outcome when others are themselves unwilling to sacrifice, and sometimes punish unfair behavior.

Projection Bias in Predicting Future Utility

People underappreciate how their own behavior and exogenous factors affect their future utility, and thus exaggerate the degree to which their future preferences resemble their current preferences. We present evidence which demonstrates the prevalence of such projection bias, and develop a formal model that draws out both descriptive and welfare implications of the bias. The model helps interpret established behavioral anomalies such as the endowment effect, and helps to explain commonly observed suboptimal patterns of behavior such as addiction and excessive pursuit of a high material standard of living. The model also suggests potentially welfare-improving policies, such as mandatory cooling-off periods for certain types of consumer decisions.

Regulation for Conservatives: Behavioral Economics and the Case for 'Asymmetric Paternalism'

Regulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in a way that imposes harm on an individual basis but yields net societal benefits. A good example is taxation to fund public goods such as roads. In such situations, an individual would be better off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax.

Incentives for Procrastinators

We examine how principals should design incentives to induce time-inconsistent procrastinating agents to complete tasks efficiently. Delay is costly to the principal, but the agent faces stochastic costs of completing the task, and efficiency requires waiting when costs are high. If the principal knows the task-cost distribution, she can always achieve first-best efficiency. If the agent has private information, the principal can induce first-best efficiency for time-consistent agents, but often cannot for procrastinators. We show that second-best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes.

Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes

The classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices. A great deal of evidence suggests, however, that in some contexts people make errors that lead them not to behave in their own best interests. Economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational, and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices. We propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory: Write down assumptions about the distribution of rational and irrational types of agents, about the available policy instruments, and about the government’s information about agents, and then investigate which policies achieve the most efficient outcomes. In other words, economists ought to treat the analysis of optimal paternalism as a mechanism-design problem when some agents might be boundedly rational. This approach has many advantages. First and foremost, by explicitly addressing when and how people do and don’t pursue their own best interests, economists will be better able to contribute to policy debates. To contribute to debates over regulating private financial decisions, we must study whether financial decisions are based on fallacious statistical reasoning and whether self-control problems lead people to borrow too heavily; to contribute to debates over teenage smoking, we must study whether teenagers become smokers against their long-run best interest. Economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it. A second advantage of our approach is that it forces us to look for the best feasible policy. Our

The economics of immediate gratification

People have self-control problems: We pursue immediate gratification in a way that we ourselves do not appreciate in the long run. Only recently have economists considered the behavioral and welfare implications of such time-inconsistent preferences. This paper outlines a simple formal model of self-control problems, applies this model to some specific economic applications, and discusses some general lessons and open questions in the economic analysis of immediate gratification. We emphasize the importance of the timing of the rewards and costs of an activity, as well as a persons awareness of future self-control problems. We identify situations where knowing about self-control problems helps a person and situations where it hurts her, and also identify situations where even mild self-control problems can severely damage a person. In the process, we describe specific implications of self-control problems for addiction, incentive theory, and consumer choice and marketing. Copyright

Inference by Believers in the Law of Small Numbers

Many people believe in the Law of Small Numbers, exaggerating the degree to which a small sample resembles the population from which it is drawn. To model this, I assume that a person exaggerates the likelihood that a short sequence of i.i.d. signals resembles the long-run rate at which those signals are generated. Such a person believes in the gamblers fallacy , thinking early draws of one signal increase the odds of next drawing other signals. When uncertain about the rate, the person over-infers from short sequences of signals, and is prone to think the rate is more extreme than it is. When the person makes inferences about the frequency at which rates are generated by different sources -- such as the distribution of talent among financial analysts -- based on few observations from each source, he tends to exaggerate how much variance there is in the rates. Hence, the model predicts that people may pay for financial advice from experts whose expertise is entirely illusory. Other economic applications are discussed.

Cognitive Dissonance and Social Change

Abstract When people behave immorally according to their own standards, they feel bad. Rational people may therefore engage in less of an immoral activity than would be in their material self-interest. Despite this fact, I show that increasing peoples distaste for being immoral can increase the level of immoral activities. This can happen because of the psychological phenomenon of cognitive dissonance : people will feel pressure to convince themselves that immoral activities are in fact moral; if each persons beliefs affect the beliefs of others, then increasing the pain from being immoral may cause members of society to convince each other that immoral activities are morally okay, and society will engage in more of such activities.

Communication between Rational Agents

Abstract Conventional game-theoretic solution concepts never guarantee meaningful communication in cheap-talk games. I define a solution concept which does guarantee communication in some games. I assume full rationality without imposing equilibrium conditions, but add a natural behavioral assumption about how agents use language: agents have a propensity to speak the truth and to believe others speak the truth, but use the games strategic incentives to check whether such behavior and beliefs are rational. I also define and prove the existence of an equilibrium version of the concept, and present examples where its predictions seem more natural than Farrells neologism-proof equilibrium.

The Gambler's and Hot-Hand Fallacies: Theory and Applications

We develop a model of the gamblers fallacy (the mistaken belief that random sequences should exhibit systematic reversals). We show that an individual who holds this belief and observes a sequence of signals can exaggerate the magnitude of changes in an underlying state but underestimate their duration. When the state is constant, and so signals are i.i.d., the individual can predict that long streaks of similar signals will continue { a hot-hand fallacy. When signals are serially correlated, the individual typically under-reacts to short streaks, over-reacts to longer ones, and under-reacts to very long ones. We explore several applications, showing, for example, that investors may move assets too much in and out of mutual funds, and exaggerate the value of financial information and expertise.