Many people display something like hyperbolic discounting. Some businesses thrive on supporting this sort of short-term excess. For example, several establishments offer payday loansâshort-term loans with ultrahigh interest rates designed to be paid off the next time the person is paid.
a) Suppose you were considering opening such a payday loan establishment. Given that hyperbolic discounters often fail to follow through on plans, how could you structure the loans to ensure payment? Use the quasi-hyperbolic model to make your argument. present bias: not gonna have $ to pay back
b) The absolute-magnitude effect suggests that people are much closer to time consistency with regard to larger amounts. How might this explain the difference in the structure of consumer credit (or short-term loans) and banks that make larger loans?
c) Lotteries often offer winners an option of receiving either an annual payment of a relatively small amount that adds up to the full prize over a number of years or a one-time payment at a steep discount. Describe how time inconsistency might affect a lottery winnerâs decision. How might the lottery winner view her decision after the passage of time?
Many people display something like hyperbolic discounting. Some businesses thrive on supporting this sort of short-term excess. For example, several establishments offer payday loansâshort-term loans with ultrahigh interest rates designed to be paid off the next time the person is paid.
a) Suppose you were considering opening such a payday loan establishment. Given that hyperbolic discounters often fail to follow through on plans, how could you structure the loans to ensure payment? Use the quasi-hyperbolic model to make your argument. present bias: not gonna have $ to pay back
b) The absolute-magnitude effect suggests that people are much closer to time consistency with regard to larger amounts. How might this explain the difference in the structure of consumer credit (or short-term loans) and banks that make larger loans?
c) Lotteries often offer winners an option of receiving either an annual payment of a relatively small amount that adds up to the full prize over a number of years or a one-time payment at a steep discount. Describe how time inconsistency might affect a lottery winnerâs decision. How might the lottery winner view her decision after the passage of time?
