Cognitive uncertainty explains various core empirical regularities, such as why people often appear very impatient, why per-period impatience is smaller over long than over short horizons, why choices frequently violate transitivity, etc

Cognitive Uncertainty in Intertemporal Choice. Benjamin Enke & Thomas Graeber. NBER Working Paper 29577, DOI 10.3386/w29577. December 2021. https://www.nber.org/papers/w29577

Abstract: This paper studies the relevance of cognitive uncertainty – subjective uncertainty over one's utility-maximizing action – for understanding and predicting intertemporal choice. The main idea is that when people are cognitively noisy, such as when a decision is complex, they implicitly treat different time delays to some degree alike. By experimentally measuring and manipulating cognitive uncertainty, we document three economic implications of this idea. First, cognitive uncertainty explains various core empirical regularities, such as why people often appear very impatient, why per-period impatience is smaller over long than over short horizons, why discounting is often hyperbolic even when the present is not involved, and why choices frequently violate transitivity. Second, impatience is context-dependent: discounting is substantially more hyperbolic when the decision environment is more complex. Third, cognitive uncertainty matters for choice architecture: people who are nervous about making mistakes are twice as likely to follow expert advice to be more patient.

9 Discussion

Contribution. Much of behavioral economics views intertemporal choice, and famous empirical regularities, as largely determined by non-standard discount functions (preferences). This paper argues for and empirically documents an important role of cognitive noise and complexity for intertemporal decision-making. An innovation of our study is that we directly measure and exogenously manipulate cognitive noise through self-reported cognitive uncertainty. Using this tool, we document that a large share of short-run impatience and hyperbolic discounting are driven by bounded rationality and cognitive noise, rather than impatient preferences. These insights matter not just from a scientific perspective but arguably have real economic implications. On the intensive margin of decision-making, hyperbolic discounting depends on complexity. On the extensive margin, cognitively uncertain people welcome the advice of experts even when those experts don’t know their preferences. While we emphasize throughout the paper that cognitive noise is complementary to (rather than replaces) taste-based present bias, we have shown that cognitive noise provides a better account of many of key economic phenomena that are often ascribed to present bias. In all, we interpret these results as providing some of the first direct empirical evidence that cognitive noise and cognitive uncertainty are relevant for a broad set of economic aspects of intertemporal choice.

Link to cognitive effects in intertemporal choice research. We conjecture that our account of cognitive uncertainty provides a rationale for extant empirical findings about “cognitive” effects in intertemporal choice research. The perhaps most widely-known result on cognition and intertemporal choice is that, if the time delay is relatively short, a lower availability of cognitive resources is associated with less patient decisions. At the same time, Ebert (2001) presents evidence that suggests that, over long horizons, a lower availability of resources makes people more patient. Our account of the link between inelasticity and cognitive uncertainty reconciles this somewhat puzzling combination of results. 

Moreover, Cubitt et al. (2018) present intriguing evidence that people’s decisions are much less sensitive to variation in the time delay when intertemporal decisions involve cross-domain comparisons (car now vs. vacation later) than when they only concern within-domain comparisons (car now vs. nicer car later). While no preferences-based intertemporal model predicts such effects, we conjecture that they are driven by higher cognitive noisiness in cross-domain comparisons.

Limitations. Our paper does not purport to explain nearly all intertemporal choice anomalies. One regularity that our study does not address are well-known framing effects, such as the speed-up / delay asymmetry (Loewenstein and Prelec, 1992) or date / delay effects (Read et al., 2005). At the same time, we do conjecture a potential link between such framing effects and our work: if one choice option is presented to people as the default that they can “speed up” at a cost, it seems plausible that people use that option as a cognitive default. Based on this idea, we conjecture that speed-up / delay asymmetries are more pronounced when cognitive uncertainty is high. More generally, this conjecture highlights that further research is needed to understand potential cognitive default actions. In this paper, we estimate the default action to be “intermediate,” which is consistent with various documentations of central tendency effects in cognitive psychology. Yet, it is important to note that the specific intertemporal choice context we study is one with which people have little or no experience. Future research will explore how potential cognitive default actions depend on experience and contextual influences.