Decisions Have An Opportunity Cost That Require Tradeoffs

Now or Later?

May 4, 2012 • Behavioral Economics, Economic Debates, Economic History, Government, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 212 Views    No Comments

Reading about why people have a tough time delaying gratification, I started to think about countries.

First people…

A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.

Next, countries…

Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising.  Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?

The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?

My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86).  For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.

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