X-Message-Number: 24421 Date: Thu, 22 Jul 2004 19:26:25 +0200 Subject: Economics of Immediate Gratification From: David Stodolsky <> The below papers discuss projection bias, a distortion in perception that effects choices over time. People prefer to have benefits now and to defer costs until later, even when it is to their disadvantage. This is hardly surprising, but the bias is such that technology alone or awareness alone may not correct it. That is, only an institutional restructuring of costs and benefits is likely to yield behavioral change. Cryonic suspension imposes costs now and yields benefits in the future. Thus, it subjects consumers to projection bias in the worst possible way. This could explain the relatively low rate of sign ups. The results suggest that no amount of education about of cryonics will produce rational choices. Education can change attitudes, but behavior may not change as a result (Thus, survey research is not adequate for studying this problem, only an experimental approach can yield solutions). From a strategic standpoint, these studies suggest that the stance taken by some advocates of cryonics is inadequate, since it rests upon individual economic rationality. Social arrangements may be the most important predictors of behavior, in the absence of formal institutional structures which rearrange payoffs and costs. We know, for example, that family members are over represented among signups. Institutional arrangements that yield near-term benefits could vastly accelerate the growth of cryonics. Perhaps traditional church membership offers a model. Members benefit from services at death, but they also can receive social, educational, etc. benefits in the near term. ------------------ Privacy in Electronic Commerce and the Economics of Immediate Gratification Alessandro Acquisti Carnegie Mellon University Abstract Dichotomies between privacy attitudes and behavior have been noted in the literature but not yet fully explained. We apply lessons from the research on behavioral economics to understand the individual decision making process with respect to privacy in electronic commerce. We show that it is unrealistic to expect individual rationality in this context. Models of self-control problems and immediate gratification offer more realistic descriptions of the decision process and are more consistent with currently available data. In particular, we show why individuals who may genuinely want to protect their privacy might not do so because of psychological distortions well documented in the behavioral literature; we show that these distortions may affect not only naive individuals but also sophisticated ones; and we prove that this may occur also when individuals perceive the risks from not protecting their privacy as significant. <http://www.heinz.cmu.edu/~acquisti/papers/privacy-gratification.pdf> [This paper suggests that tens of billions of USD a year are being lost because consumers fail to act in a rational manner. It discusses approaches and solutions:] However, only an experimental approach over different periods of time in a controlled environment may allow us to disentangle the influence of several factors. Surveys alone cannot suffice, since we have shown why survey-time attitudes will rarely match decision-time actions. An experimental verification is part of our ongoing research agenda. The psychological distortions we have discussed may be considered in the ongoing debate on how to deal with the privacy problem: industry self-regulation, users self protection (through technology or other strategies), or government s intervention. The conclusions we have reached suggest that individuals may not be trusted to make decisions in their best interests when it comes to privacy. This does not mean that privacy technologies are ineffective. On the contrary, our results, by aiming at offering a more realistic model of user-behavior, could be of help to technologists in their design of privacy enhancing tools. However, our results also imply that technology alone or awareness alone may not address the heart of the privacy problem. Improved technologies (with lower costs of adoption and protection) and more information about risks and opportunities certainly can help. However, more fundamental human behavioral mechanisms must also be addressed. Self-regulation, even in presence of complete information and awareness, may not be trusted to work for the same reasons. A combination of technology, awareness, and regulative policies - calibrated to generate and enforce liabilities and incentives for the appropriate parties - may be needed for privacy-related welfare increase (as in other areas of an economy: see a related analysis:). PROJECTION BIAS IN PREDICTING FUTURE UTILITY GEORGE LOEWENSTEIN TED O DONOGHUE MATTHEW RABIN <http://sds.hss.cmu.edu/faculty/Loewenstein/downloads/ projection%20bias.pdf> People underappreciate the effects of long-term changes in tastes, such as those that result from adaptation to a shifting standard of living. People also underappreciate the effects of frequently fluctuating tastes, such as fluctuating hunger. Indeed, virtually all evidence we are familiar with on misprediction of future tastes is consistent with projection bias. dss David S. 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