Using Behavioral Experiments to Capture Time Inconsistency in Households Financial Decision Making

Project Start:01/2019
Researchers:Andrej Gill, Florian Hett
Area: Household Finance, Experiment Center
Funded by:LOEWE

Topic and Objectives

This project represents a follow-up extension of the SAFE project “Financial Decision Making and Present Bias”. Within this existing project, we study the prevalence of time inconsistency in households’ financial decision making. By collaborating with a FinTech startup, we can access detailed financial account data from approximately 50,000 clients. Using this transaction-level bank account data, we elicit whether people show signs of present bias. The crucial characteristic of this data set is that it allows us to explicitly identify those individuals whose consumption, financing, and savings behavior can be classified as present biased.

We then assess our findings by conducting an online experiment with the same people and checking whether an experimental measure of present bias predicts real behavior that is consistent with present-biased preferences. The hereby proposed extension of the project aims at improving the measurement of present bias using behavioral experiments by focusing on allocating real effort decisions rather than monetary payments over time. This serves two purposes: First, it represents a potentially substantial enhancement to our initial study, as a robust and precise measure of present bias is a fundamental requirement to assess its role in financial decision-making. Second, how to measure time preferences in general and present bias is currently a very active debate in the literature. Hence, the possibility to compare different recently developed methods in their ability to predict relevant field behavior represents an important contribution to this debate.

Key Findings

This project was a follow-up of the project “Financial Decision Making and Present Bias”.