Beyond Beta-Delta: The Emerging Economics of Personal Plans

By JOHN BESHEARS, KATHERINE L. MILKMAN AND JOSHUA SCHWARTZSTEIN*

* Beshears: Harvard Business School, Baker Library, Soldiers future health), even though she may deem the Field, Boston, MA 02163 (e-mail: [email protected]). Milkman: The Wharton School, The University of Pennsylvania, 566 Jon M. action to be in her overall best interest when Huntsman Hall, 3730 Walnut Street, Philadelphia, PA 19103 (e-mail: she judges it before the opportunity for action [email protected]). Schwartzstein: Harvard Business School, Baker Library, Soldiers Field, Boston, MA 02163 (e-mail: arises. According to the beta-delta model, [email protected]). We thank Tristan Gagnon-Bartsch, Sendhil techniques for increasing the likelihood that Mullainathan, Alex Rees-Jones, and Richard Thaler for their helpful comments. this individual will take the preventive health measure include reducing the up-front costs or

offering her a commitment device. Recent In his book Misbehaving: The Making of field studies, however, have documented the Behavioral Economics, Richard Thaler writes success of another technique. Simply about “Supposedly Irrelevant Factors” (SIFs), prompting people to form concrete plans of or factors that observably affect economic action regarding when, where, and how they decisions but are neglected by neoclassical will implement their intentions produces models of consumer behavior (Thaler 2015). improvements in follow-through, even when In this article, we highlight an important SIF such prompts do not alter the costs and that is neglected not only by neoclassical benefits of the action or change the models, but also by now-standard behavioral opportunities for using commitment strategies economics models like the beta-delta model of (Milkman et al. 2011, 2013). time discounting (Laibson 1997). That SIF is a People make personal plans frequently (e.g., “personal plan.” they write “to do” lists, keep calendars, and For example, consider someone who has the set deadlines). Many popular books, like opportunity to engage in a preventive health Getting Things Done: The Art of Stress-Free action, such as obtaining a flu shot or a cancer Productivity, are devoted to the topic (Allen screening. If she has beta-delta preferences, 2002). However, personal plans for future she may fail to take the action because it actions play a limited role in traditional entails up-front costs (inconvenience and economic analyses of individual decision discomfort) and delayed benefits (improved

making. Neoclassical models typically treat a plan allows her to implement a personal personal plan as nothing more than an agent’s management strategy that counteracts limited (correct) understanding of the actions she will attention. An individual may also form a plan take in every possible future contingency. for less sophisticated reasons, and such a plan Plans become more interesting when agents’ may become self-fulfilling. For example, a actions deviate in predictable ways from those person who arbitrarily plans to order chicken plans (see Milkman, Rogers, and Bazerman at a restaurant (perhaps because she recently 2008 for one review), for example as a saw an advertisement for chicken) may be consequence of beta-delta intertemporal more likely to end up choosing chicken over discount functions (Laibson 1997) or the fish because the plan creates a reference point conflicting preferences of “multiple selves” from which she is reluctant to deviate (Thaler and Shefrin 1981). If an analyst were (Kahneman and Tversky 1979, Kőszegi and looking for the object in these models that Rabin 2006). most closely resembles a personal plan, she We are not the first to take up personal might point to the agent’s most preferred plans as the subject of economic inquiry, but complete contingent future course of action. we wish to highlight the important yet Alternatively, she might point to the agent’s underappreciated role of plans in driving beliefs about the course of action the agent economic outcomes. We organize our will take, regardless of the accuracy of those discussion by considering three questions. beliefs (O’Donoghue and Rabin 1999). First, what are the effects of plans on In this article, we adopt a third perspective behavior? Second, when are plans formed? that emphasizes how personal plans can play a Third, how do plans deviate from optimality? more direct role in influencing behavior, and For each of these questions, we (a) offer a not only to overcome self-control problems: brief overview of existing research that sheds the simple act of planning to take an action light on the issue and (b) identify gaps in can increase the likelihood of taking that current knowledge. We emphasize action. An individual may not form a concrete connections to the growing theoretical plan in the first place. If the individual does literature that gives personal plans a form a plan, it may correspond neither to substantive role, but we conclude that more preferred future actions nor to beliefs about research is needed, especially on the latter two future actions because, for example, such a questions we cover. I. What Do Plans Do? Second, plans create goals or personal rules with the purpose of helping people follow We discuss three ways in which plans affect through on their intentions. A large literature behavior. demonstrates that setting a challenging, yet First, planning helps us overcome barriers to attainable, explicit goal increases following through on our intentions. The achievement, even in the absence of external planning prompts mentioned above have been incentives (Locke and Latham 1990). One shown to improve follow-through in domains force at play is people’s strong desire to be ranging from voting (Nickerson and Rogers internally consistent and thus to avoid 2009) to obtaining flu shots (Milkman et al. breaking explicit commitments (Festinger 2011). One barrier to follow-through that 1962). In addition, people may be reluctant to planning prompts help people overcome is the fall short of goals, which could become failure to attend to logistics (e.g., arranging reference points, because of loss aversion childcare in order to visit the doctor). (Heath, Larrick, and Wu 1999).2,3 Contemplating logistical hurdles in advance Third, plans influence behavior because makes it easier to develop strategies for they frame decisions even when they are not working around them. Another barrier to formed with the objective of increasing follow-through that planning prompts help follow-through. To take an example, models people address is forgetfulness. Encouraging of expectations-based reference dependence people to articulate a plan embeds intentions predict a stronger taste for buying insurance more firmly in memory by prompting deeper when the opportunity to buy is anticipated— processing and attention. Planning prompts and a plan to buy is made—than when it is also associate cues like the intended execution not, since expected premium payments are time with the need to act. In line with this reasoning, planning prompts are particularly effective among populations at higher risk for forgetfulness, such as the elderly and parents 2 Models of personal rules in economics include Benabou and 1 Tirole (2004) and Hsiaw (2013). (Milkman et al. 2013). 3 One particularly interesting class of personal rules has been dubbed “mental accounting.” Mental accounting describes the tendency to treat time and money as if they are not fungible but instead belong to distinct accounts that can only be used for a pre- determined purpose or during a pre-determined time interval (Thaler 1985). By creating mental budget limits (e.g., “I will only spend 1 $3,000 on leisure travel this year”), people may be able to overcome Models of “thinking ahead” in economics include Bolton and the impulse to splurge on temptations. Faure-Grimaud (2009). 2 Models of personal rules in economics include Benabou and

then not coded as a loss (Kőszegi and Rabin “diet” on Google and create personal goals at 2006, 2007).4 a higher rate following these fresh start dates (Dai, Milkman, and Riis 2014). At the start of II. When Do People Form Plans? a new cycle, people perceive that their

The research described in the previous previous failings occurred in the more distant section highlights the effects of plans on past, and this greater psychological distance behavior, but it largely leaves open the creates an opportunity to break with bad question of when people form plans. People patterns of behavior and form new, optimistic do not update their plans continuously. One plans (Dai, Milkman, and Riis 2015). model is that individuals update their plans at Past research in psychology has also shown regular intervals on a fixed schedule (Gabaix that life shocks (e.g., job changes) that alter a and Laibson 2002). Another is that individuals person’s surroundings and routines often incur cognitive costs from planning and induce changes to plans (Wood et al. 2005). In choose when to plan by trading off those many cases, the timing of the plan change is cognitive costs against the benefits of rational, but there is also evidence that people optimizing their decisions (Reis 2006). Both update their plans when predictable shocks to models likely contain some truth, but research their circumstances occur, such as when a job in psychology indicates that planning takes seeker exhausts unemployment insurance place on a more nuanced schedule. benefits (Ganong and Noel 2015). Research on the “fresh start effect” has III. How Do Plans Deviate from shown that people are more likely to engage in Optimality? self-controlled acts, such as planning, at the start of new cycles like the beginning of the Projection bias (Loewenstein, O’Donoghue, week, month, or year and following holidays and Rabin 2003), naïveté about self-control and birthdays. People search more for the term problems (O’Donoghue and Rabin 1999), and overconfidence in one’s ability to remember 4 Plans also matter in models where the choice context influences to take actions (Ericson 2011) may all lead how attributes of different options are weighed (Bordalo, Gennaioli, and Shleifer 2013; Kőszegi and Szeidl 2013; Bushong, Rabin, and people to form suboptimal plans.5 Schwartzstein 2015) because this context can be shaped by the timing of when an agent forms her plan. For example, in the Bushong et al. model of relative thinking, a worker is less willing to put in effort for a fixed return in an environment where she expected to earn more at the time of making her plan, since this makes the return feel small. The model suggests that she would be more inclined to put in effort 5 if, prior to making a plan, she received a more precise signal about People also form overly optimistic plans, thinking they will get returns. more done than they actually do (Buehler, Griffin, and Ross 1994). As a consequence, people’s plans often fail There are also important open questions to incorporate adequate mechanisms for regarding how best to measure plans, as shaping future behavior. For example, eliciting a plan may alter it or cause it to be forgetting to take your medication is partly created in the first place. Despite this attributable to forgetfulness, but also partly challenge, our understanding of the role of due to a failure to make plans that compensate plans in driving economic outcomes would be for forgetfulness. We can set alarms to take greatly enriched by considering whether, our pills, but many of us do not, contributing when, where, and how people intend to take to low adherence (Osterberg and Blaschke actions and collecting more data on these 2005; Baicker, Mullainathan, and questions. Schwartzstein 2015). Along these lines, many REFERENCES people are unwilling to pay to have a cue that serves as an effective reminder for engaging in Allen, David. 2002. Getting Things Done: a beneficial behavior, even when the cue leads The Art of Stress-Free Productivity. to higher economic payoffs net of its cost London: Penguin Books. (Rogers and Milkman 2015). Also, the fact Baicker, Katherine, Sendhil Mullainathan, that planning prompts can be effective (as and Joshua Schwartzstein. 2015. discussed above) suggests that people do not “Behavioral Hazard in Health Insurance.” always form effective plans (Milkman et al. Quarterly Journal of Economics 130 (4): 2011). 1623–1667. Benabou, Roland, and Jean Tirole. 2004. IV. Conclusion “Willpower and Personal Rules.” Journal of People often develop personal plans to help Political Economy 112 (4): 848–886. themselves follow through on their intentions. Bolton, Patrick, and Antoine Faure- Plans can also influence behavior by shaping Grimaud. 2009. “Thinking Ahead: The reference points and how decisions are Decision Problem.” The Review of framed. However, a complete account of the Economic Studies 76 (4): 1205–1238. role of plans in economic decision making Bordalo, Pedro, Nicola Gennaioli, and will require deeper knowledge of when and Andrei Shleifer. 2013. “Salience and how plans are formed. Consumer Choice.” Journal of Political Economy 121 (5): 803–843.

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