Optimal Time-Inconsistent Beliefs: Misplanning, Procrastination, and Commitment

Markus Brunnermeier, Filippos Papakonstantinou () and Jonathan Parker
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Filippos Papakonstantinou: Imperial College London, South Kensington Campus, London SW7 2AZ, United Kingdom

Management Science, 2017, vol. 63, issue 5, 1318-1340

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.

Keywords: optimal beliefs; optimism; time-inconsistent beliefs; time-inconsistent preferences; procrastination • planning fallacy • preference for commitment (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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