The Psychology of Self-Control and Consumption-Saving Decisions: Cognitive Perspectives

We study consumption/saving decisions in an environment in which agents face a conflict between present and future utility which may require self-control for its resolution. We derive behavioral foundations for our analysis of self-control from the cognitive sciences, and in particular from the study of cognitive control in ‘delayed response’ tasks. In our model, self-control requires the activation in working memory of a consumption/saving goal, and is therefore costly in terms of cognitive capacity. Dynamic decision making involves setting ex-ante a saving goal and then deciding when to exercise self-control ex-post, that is, when to inhibit stochastic consumption impulses (temptations) and adhere to the goal. Our analysis of consumption/savings decisions is novel in terms of its foundations and its recognition of the agents’ ability to self-control; it has markedly different implications than the standard behavioral models of dynamic decision making. ∗Thanks to Antonio Rangel, Colin Camerer, Andrew Caplin, Alessandro Lizzeri, Camillo Padoa Schioppa, Ellen Peters, Ariel Rubinstein, Aldo Rustichini, Andy Schotter, Giorgio Topa; and especially to John Leahy for many comments and for spotting a mistake in an earlier version. We are also grateful to the participants to the Psychology and Economics segment of SITE at Stanford, and the Psychology and Economics seminar of CESS at NYU.