CFDP 2074

Author(s): 
CFDP Title: 

Behavioral Characterizations of Naiveté for Time-Inconsistent Preferences


Publication Date: February, 2017

Pages: 59pp

Abstract: 

We propose nonparametric definitions of absolute and comparative naivete. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent between choosing from a menu ex post or committing to the actual distribution of choices from that menu ex ante. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naivete and explore the restrictions implied by our definitions for several prominent models of time inconsistency. Finally, we discuss the implications of general naivete for welfare and the design of commitment devices.

Keywords:

Naive, Sophisticated, Time inconsistent, Comparative statics


JEL Classifications:

D900