The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation

O ur preferences for the long run tend to conflict with our short-run behavior. When planning for the long run, we intend to meet our deadlines, exercise regularly, and eat healthfully. But in the short run, we have little interest in revising manuscripts, jogging on the StairMaster, and skipping the chocolate soufflé à la mode. Delay of gratification is a nice long-term goal, but instant gratification is disconcertingly tempting. This gap between long-run intentions and short-run actions is apparent across a wide range of behaviors, including saving choices. A 1997 survey found that 76 percent of respondents believe they should be saving more for retirement. Looking only at respondents who believed they were at an age where “you should be seriously saving already,” the survey found that 55 percent reported being “Behind” in their savings and only 6 percent reported being “Ahead” (Farkas and Johnson, 1997). The report on the survey concluded: “[T]he gaps between people’s attitudes, intentions, and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire. Americans are simply not doing what logic—and their own reasoning—suggests they should be doing.” A 1993 Luntz Webber/Merrill Lynch survey found similar answers when baby boomers were asked: “What percentage of your annual household income do you think you should save for retirement?” and “What percentage of your annual