Optimal Time-Inconsistent Beliefs: Misplanning, Procrastination, and Commitment
Markus K. Brunnermeier, Filippos Papakonstantinou, Jonathan A. Parker
Management Science · 2017 · Volume 63 · Issue 5
Abstract
We develop a structural theory of beliefs and behavior that relaxes the assumption of time consistency in beliefs . Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are that (i) optimal beliefs are optimistic and time inconsistent; (ii) people optimally exhibit the planning fallacy; (iii) incentives for rapid task completion make beliefs more optimistic and worsen work smoothing, whereas incentives for accurate duration prediction make beliefs less optimistic and improve work smoothing; (iv) without a commitment device, beliefs become less optimistic over time; and (v) in the presence of a commitment device, beliefs may become more optimistic over time, and people optimally exhibit preference for commitment. This paper was accepted by Neng Wang, finance .
Keywords
optimal beliefs, optimism, time-inconsistent beliefs, time-inconsistent preferences, procrastination, planning fallacy, preference for commitment
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