Deck 13: Committing and Uncommitting

Question 1

Odysseus' inability to avoid temptation without a commitment mechanism means he can be best described as a naïf.

Answer 1

False

Question 2

The optimal amount of savings for time consistent, naifs and sophisticates occurs where the marginal utility of savings is zero.

Answer 2

True

Question 3

Sophisticates are always better off than naïfs.

Answer 3

False

Question 4

Time consistent individuals are always better off than either sophisticates or naïfs.

Question 5

Fiona has time inconsistent preferences and must when to go to the doctor over the next 4 days. She is a sophisticate and so she uses backward induction to decide when to go because this method will yield the optimal solution.

Question 6

Erin has time consistent preferences must decide when to go to the doctor over the next 4 days. She knows she must go one of these four days. She knows that using backward induction to decide when to go will yield the optimal solution.

Question 7

A sophisticate cannot be made worse-off by committing.

Question 8

When a sophisticate binds himself to a path of action using a commitment mechanism, at every period $t$ , he sees that he is better off with the commitment mechanism than without.

Question 9

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In this setting, the naif violates the dominance property.

Question 10

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In this setting, the naïf obeys the Independence of Irrelevant Alternatives.

Question 11

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In this setting, the sophisticate obeys the dominance property.

Question 12

A sophisticate solves the inter-temporal model recursively, while a naiff solves the intertemporal problem simultaneously from the point of view of the first period.

Question 13

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In this setting, the sophisticate obeys the Independence of Irrelevant Alternatives.

Question 14

The difference in timing between rewards and costs explain the violation of the dominance property by naifs and sophisticates.

Question 15

A sophisticate will never complete an identical task after a naïf.

Question 16

Naifs and sophisticates always violate either the dominance property or the property of independence of irrelevant alternatives.

Question 17

Commitment mechanisms

A) Force the individual into a specific action plan.
B) Must be enforced by an objective party.
C) Cannot be broken.
D) Reduce the possible the number of choices available in the future.

Question 18

An assumption that is implicitly built in to the fully additive inter-temporal model is

A) Decision-makers can fully commit to their plan of action.
B) Decision-makers do not exhibit loss aversion.
C) Decision-makers do not exhibit overconfidence.
D) Decision-makers are risk-neutral

Question 19

Fiona must decide when to go to the doctor. There are four possible days she could go, each incurring a higher cost and the same benefit. Fiona must go to the doctor on one of these days. Fiona solves the problem using backward induction. This means she begins solving the problem from the point of view of

A) Day 1
B) Day 2
C) Day 3
D) Day 4

Question 20

A naif cannot solve the inter-temporal problem recursively because

A) A naif does not realize there will be future time periods.
B) A naif is unable to predict how their future plans are connected to their current plans.
C) A naif does not know his risk preferences in the future.
D) A naïf does not know his loss aversion in the future.

Question 21

Why is a naif unwilling to pay for a commitment mechanism?

A) A naïf does not like to commit.
B) A naïf is too risk-seeking to commit.
C) A naif does not foresee the need to commit.
D) A naif's beliefs are too overconfident to foresee the need to commit.

Question 22

Scenarios in which rewards are experienced in the same time period as the action to acquire the reward are called,

A) Current rewards
B) Today's rewards
C) Immediate rewards
D) Delayed rewards.

Question 23

Scenarios in which costs are experienced later than the action to incur the cost are called,

A) Immediate costs.
B) Today's costs
C) Delayed costs.
D) Current costs

Question 24

A partially naïf individual believes $\beta \neq \delta$ , but $\beta=\hat{\beta}$ . If $\beta=\frac{1}{2}$ , which of the following could be possible values of $\hat{\beta}$ ?

A) $\frac{3}{4}$
B) $\frac{2}{5}$
C) $\frac{1}{4}$
D) $\frac{3}{8}$

Question 25

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . Suppose the decision-maker is partially naïve and believes $\hat{\beta}>\beta$ . For which value of $\hat{\beta}$ does the decision-maker's choice violate the dominance property?

A) $\hat{\beta}=\frac{1}{2}$
B) $\hat{\beta}=\frac{8}{11}$
C) $\hat{\beta}=\frac{4}{11}$
D) $\hat{\beta}=1$ .

Question 26

Joy needs to clean the house before her parents come on Sunday. Today is Friday. This means Joy can clean either Friday, Saturday or Sunday. The reward for cleaning the house is that Joy gets to enjoy a clean home, but the cost is that she will have to give up planned activities with her friends. Let $v_{t}=\{10,0,0\}$ be the reward for cleaning the house on Friday, Saturday, Sunday, respectively. Let $c_{t}=\{0,2,1\}$ be the cost of cleaning the house on Friday, Saturday, Sunday, respectively. The Dominance Property requires Joy to clean the house on which day?

Question 27

Joy needs to clean the house before her parents come on Sunday. Today is Friday. This means Joy can clean either Friday, Saturday or Sunday. The reward for cleaning the house is that Joy gets to enjoy a clean home, but the cost is that she will have to give up planned activities with her friends. Let $v_{t}=\{10,0,0\}$ be the reward for cleaning the house on Friday, Saturday, Sunday, respectively. Let $c_{t}=\{0,2,1\}$ be the cost of cleaning the house on Friday, Saturday, Sunday, respectively. Suppose her parents call and inform Joy that they are coming home on Saturday as opposed to Sunday. Does this change Joy's optimal action if she is time consistent and why?

Question 28

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=0$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In which time period does the naïf act?

Question 29

Consider the example given on pages 3-12 and 3-13. Suppose $k_{v}=k_{c}=1$ , that is both costs and rewards are immediate. Let the remaining parameters be unchanged, so that $v_{t}=$ $\{8,20,0\}, c_{t}=\{0,9,1\}, \beta=\frac{1}{2}, \delta=1$ . In which time period does the sophisticate act?