Economists seeking to understand human behaviour have turned to experiments with birds for insight. For instance, like people, pigeons prefer immediate rewards, even when a little patience would yield a bigger payoff.
Thus despite the fact the absolute time difference between receiving the two rewards was the same (2 seconds), pigeons were willing to wait 2 seconds longer only if the payoff was shifted into the future.
Economists usually assume that each individual discounts the future at a constant rate that reflects his or her time preference. But, like pigeons, many people discount short-term events at a much higher rate than events in the far future. For example, many people will prefer a smaller reward tomorrow to a larger reward one year from now; but when the smaller reward is due in one year and the larger reward is due in two years, they will tend to prefer the latter.
Different short- and long-term discount rates may explain why people find it difficult to save for retirement: they must forgo consumption (immediate reward) for a bigger long-term payoff. Using this insight, a company offered employees the opportunity to commit in advance to saving more out of future salary increases. Prior to the offer, the employees on average saved only 3.5 percent. Over 28 months the average saving rate rose to 11.8 percent.
Source: Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich), The Economics of Impatience, Nature, January 17, 2002.
For more on Saving http://www.ncpa.org/iss/eco/
FMF Policy Bulletin\17 April 2002
