Sit-up or pay up

15th December, 2007

Economists rarely make good forecasts, but let me venture one: most readers of this column will eat and drink heavily over the next two weeks (as will its writer), and many of us will, on January 1, vow to do better in future. Can economics provide a little assistance in coping with this annual ritual?
I think it can, and so do three economists at Yale who’ve been helping me out. Professors Dean Karlan and Ian Ayres (who is also a law professor and the author of Supercrunchers), along with Jordan Goldberg, a business-school student, have a cheque from me for $1,000, about £500.

If I do not do 200 press-ups and 200 sit-ups each week, they’ll start sending my money to a charity, $100 at a time. (I chose the hugely deserving DC Central Kitchen.) They will shortly offer the same dubious privilege to countless others via a new company, – customers name their own pledges, sign pro-forma contracts, and put their cheques in the post.

It’s a clever business idea, and a variant on the old theme of making a bet with a friend that you can lose weight or quit smoking. But it doesn’t fit anywhere in classical economics. The odd robotic creature who populates traditional economic models does not need an incentive to stiffen its resolve. In fact, “resolve” is not a concept that translates into the standard model of economic behaviour.

Yet economists have been thinking about these problems for a long time. More recently, they have used behavioural experiments to raise economics to the level of common sense (no mean feat) and perhaps beyond.

One of my favourite examples: participants in an experiment were offered a choice of films to watch. Depending on whether the film was to be watched immediately or in a few days, the subjects chose something light like Mrs Doubtfire, or something character-building such as Schindler’s List. When offered the chance to change their minds at the last minute, many who had signed up for a highbrow experience buckled and grabbed something less challenging.

Daniel Read, one of the researchers, and an economist at the London School of Economics, told me that he caught himself behaving in exactly the same way.

He subscribed to a film rental service and kept rearranging his favourites so that highbrow films never quite reached the top of the waiting list. These lapses are not rational. But we can still be rational in anticipating them and taking steps to pre-empt them.

Dean Karlan, one of the men behind, discovered this first-hand in his day job, in which he researches the effectiveness of small financial institutions in poor countries. With two colleagues, he designed a new savings product for a small rural bank in the Philippines. The Seed (save, earn, enjoy deposits) savings accounts paid the standard rate of interest but would not allow withdrawals until either a specified date had passed or a specified amount had been saved. (There were exemptions, for example, for a documented medical emergency, but no savers took advantage of them.)

Karlan surveyed some of the customers, asking hypothetical questions designed to reveal indirectly the sort of preferences that might indicate a self-control problem. He found that women (not men) whose responses suggested a lack of self-control were also more likely to open a Seed account. And a randomised trial found that the Seed accounts did substantially boost saving.

In other words: when we need help with self-control, we tend to know it. I certainly did. Two hundred sit-ups a week might not sound a lot, but it is 200 more than I was doing before. And I can say for certain that if my money hadn’t been on the line, there’s no way I’d be sticking to it.

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