A standard assumption in economics is that consumers make reasonable forecasts about what they will do in the future and make plans on that basis. Behavioral economics notes, to the contrary, that many people appear to have inconsistent preferences. A classic example is the tendency to procrastinate. For example, we may conclude that the cost of exercising is more than offset by its benefits, especially if we commit to starting exercising next week. But when next week arrives, we do not want to work out; we want to put it off for another week. Last week the costs were in the future; this week they will be realized right now. Decisions that I make today may conflict with decisions that I make next week, even though nothing has changed.
This inconsistency appears to involve rather odd patterns of discount- ing future benefits and costs. For example, if you regard being paid $988 today as being just as good as being paid $1,000 in three months, your personal discount rate is less than 5 percent per year.1 Would you prefer getting $790 now to getting $1,000 in three months? If so, you are acting as though your discount rate is more than 150 percent per year. A discount rate of more than 150 percent per year seems pretty high, but the real anomaly is that people sometimes use 5 percent and sometimes use 150 percent or more for seemingly similar transactions.