Indonesia | Economics

Saturday, December 15, 2007

Put your money where your resolution is!

The new year is coming; time to "renew" last year's resolution. Now, if this sounds familiar, maybe this company can help you. The company, founded by three economists, helps columnist Tim Harford do sit-ups:
Economists rarely make good forecasts, but let me venture one: most readers of this column will eat and drink heavily over the next two weeks (as will its writer), and many of us will, on January 1, vow to do better in future. Can economics provide a little assistance in coping with this annual ritual?

I think it can, and so do three economists at Yale who’ve been helping me out. Professors Dean Karlan and Ian Ayres (who is also a law professor and the author of Supercrunchers), along with Jordan Goldberg, a business-school student, have a cheque from me for $1,000, about £500.

If I do not do 200 press-ups and 200 sit-ups each week, they’ll start sending my money to a charity, $100 at a time. (I chose the hugely deserving DC Central Kitchen.) They will shortly offer the same dubious privilege to countless others via a new company, Stickk.com – customers name their own pledges, sign pro-forma contracts, and put their cheques in the post.

Sounds like a promising idea (and I love the company's slogan: "Put a contract out on yourself!"). Immediately, though, I thought of a few of my friends who bought gym memberships (charged at the beginning of each month), vowing to exercise regularly, only to flounder and forfeit their memberships. How is this different?

The difference lies in the way the costs are incurred. In the case of the gym membership, the cost is paid in advance. This is what economists call "a sunk cost": Once incurred, it cannot be recovered -- and therefore, as economists would like to advise you, rational individuals should not let it affect their decisions.

Here, however, the cost is only incurred if a person fails to live up to his/her own promise (to himself/herself). Hence, an individual's present decision can still affect the cost. This contract on yourself increases the cost of reneging on your own promises.

Individuals who are likely to register to this service are those "at the margin" -- individuals who (think that they) generally have self-control, but sometimes need a little help. Blatant (but rational) resolution-breakers will not join because they know it's a waste of money. The service has potential.

I see one potential problem and a way to improve the service. First, the problem: enforcement under adverse selection. In order for the system to work, there must be a means to verify that the individual followed through on the contract. Otherwise, we will quickly revert to the status quo. Otherwise, individuals have an incentive to say they did follow through to avoid getting penalized.

My second issue is on the use of the penalty. Harford suggests the penalty will be sent to a charity of his choosing -- i.e., the charity that he likes. The downside to this is that it's easy for individuals to rationalise broken contracts ("Oh, I feel like being charitable this month!"). To remove such delusions about our motives, I propose that the penalty be sent to a cause that the individual dislikes.

PS: Harford is coming up with his second book, The Logic of Life, another attempt to popularise economics following his entertaining The Undercover Economist.

UPDATE: The people at stickK have addressed the issues I mentioned above. Thank you to Jordan Goldberg for the clarification.

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1 Comments:

  • You bring up good points about stickK.

    With respect to verification: stickK allows users to choose third party referees who hold the user accountable.

    With respect to the stakes: stickK allows users to choose a friend or an enemy as a recipient instead of charity. In addition, for those who do choose charity, we do not allow the user to choose to which charity the money will go. The money will go to one of 5 randomly selected recipients

    And we will be adding the "anti-charity" feature shortly after the launch.

    Thanks for your interest, and if you have any questions, feel free to ask!

    Jordan Goldberg, www.stickK.com

    By Blogger jag83, at 12/15/2007 03:36:00 pm  

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