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Ashraf, Karlan and Yin (2006) skillfully encapsulate the theme of their study in their metaphoric title. The title of the article refers to the great classic poem ‘The Odyssey’ where the hero Odysseus must search a course “to evade the voices of the marvelous sirens in their flowering meadow’. He orders the sailors on his ship “You are to tie me hand and foot and stand me upright in the mast housing and fasten the rope ends round the mast itself, and if I beg you to free me, bind me yet more tightly’. By deliberately restricting his own freedom, Odysseus skillfully averts temptation. This teaches us that those of us who face temptation regularly, not from sirens but in practical aspects of life, where we are impatient and lack the self-control to save and defer gratification. Although we do not want our attention to wander from crucial aspects of our life, inescapably it does, and therefore we need to tie ourselves to the mast, constraining our freedom beforehand, so that, paradoxically we are free to achieve what we really want to achieve.
Evidently, the motivation of this article, I believe, is to experiment with a representation of preferences for consumption over time. To examine whether commitment devices for savings are helpful for those with self-control issues (hyperbolic preferences) and if they could ex ante improve an individual’s welfare.
This model is the pioneer in linking reversals on hypothetical time discount questions to a decision to engage in various forms of commitment devices voluntarily. This is an important distinction which is absent in previous models. These previous models have argued individuals will show less impatience for future trade-offs in comparison to near-term trade-offs. Central to these models are hyperbolic preferences and theories of temptation and self-control to exhibit this hypothesis but there is little empirical evidence to suggest individual’s desire for commitment devices.
In comparison, Ashraf (2006) claims if individuals with time-inconsistent preferences can fathom their weaknesses, it would be beneficial to observe preferences in a mechanism where different levels of commitment, limits their current self from consuming instead of saving. He masterfully chooses field work to reflect on a real-life problem as it would allow behavioral and developmental economists to explore interventions capable of assisting individuals with inconsistent time preferences to stop delaying things till tomorrow. To be like Odysseus, I believe is an intellectual metaphor, Ashraf (2006) uses to describe a hyperbolic discounter and acknowledge that the future self can act irrationally, thus to secure oneself to a commitment mechanism to withstand the dynamic inconsistency.
Furthermore, this article adds to a critical debate regarding validity of evidence for preference reversals in the survey questions on time discounting, temptation models, hyperbolic discounting model, a non-reversal models whereby between absolute time periods individuals discount rates differ, a greater uncertainty regarding future events in comparison to current events or simply superficial responses or noise. First two explanations support a desire for commitment, whereas the remaining four do not. I believe, these outcomes are bound to have implications in relation to the development of efficient saving practices for financial institutions and policy-makers, emphasizing the dynamics of the product influence types of individuals who take the product and their saving levels.
Such finding may assist microfinance institutions in developing countries to provide an array of commitment and saving products. Yet only a handful of researchers have examined the impact saving product designs may administer on saving levels. Since an individual and institutional context, saving levels are usually considered to be depressed, this relationship must be implicitly understood.
To identify individual’s time preferences Ashraf (2006) run a household survey of 1777 existing and former clients of Green Bank asking hyperbolic time discounting questions. Using their survey data, he argues individuals do not seek to save further as they are tempted to consume their money now (impatient now, patient later). Since they prioritize hyperbolic preferences in consumption, they have a high discount rate in their immediate future and a lower rate between periods further away.
The introduction of the SEED product provides them with a commitment feature which restricts their access to their funds until they reach a set goal whilst providing no further benefits, hence eliminating the impact of any other variable on their desire to pursue the product other than their desire to commit through self-awareness. (Describe types of commitment devices and the advantage of having this variety)
The large sample size of this study allows for representative results, however, there is little evidence from other studies that such questions can count as evidence for individual preferences.
An innovative experimental procedure known as the randomized controlled methodology is employed by Ashraf (2006). It is a rigorous way of determining whether a cause-effect relation occurs between providing SEED and the savings outcome while evaluating the cost-effectiveness of the product. This method is the gold standard of impact evaluation. Various other study designs, including non-randomized controlled methods, can expose links between SEED and the savings outcome, however, they fail to exclude the prospect of an outcome provided by SEED to be triggered by a third factor connected to both intervention and outcome.
At Random, 50 per cent of the sample was offered the SEED product whilst the remaining half was either control group which received no further pressure to pursue any products or a marketing group which received special face to face visits to encourage savings using the bank’s existing savings products. Ashraf (2006) strategically uses this random allocation to guarantee no systematic differences between SEED groups in factors, known and unknown, may affect savings outcome. If the assignment is truly random, then we can confidently conclude that differences between the control groups and the treatment groups after the intervention of SEED are attributable to the treatment of SEED itself. Ashraf (2006) does well in treating all groups identically, except the control group who are not referred to any commitment device, it allows the analysis to be focused on estimating the size of the difference in savings between the groups. Moreover, field research is often more naturalistic and realistic and can generate fewer suspicions in participants. Under lab conditions, the money used is often hypothetical or very low to produce reliable and representative results in comparison to individual’s committing to use their own money over time.
Another interesting idea proposed in Ashraf’s is the role of self-awareness in decision making since it is significantly important in the self-control framework. Psychological conflicts ascend if an individual generally remembers their preference differed in the past. If an individual is self-aware, they may also come to comprehend in the future they may regret their action to consume as from a future prospect, discounted costs of not saving exceeds discounted benefits.
However, I believe, one implication in Ashraf’s study of individuals being self-aware of their time inconsistencies is that people will make commitments to prevent them from taking later actions which fall into the category of ‘vices’. Out of the commitment devices provided in the study, the devices deemed too strict for imposing liquidity constraints may run the risk of frightening individuals away. A trade-off between commitment and flexibility is a recurrent problem in the plan of financial products. While there exists a demand for products that restrict in the future, so they cannot grasp their present saving goals, unforeseen shocks may compel households to discontinue their commitment. In such cases strong commitment devices may even reduce welfare, going against the aims of this paper. This can perhaps explain why a majority of the sample did not opt from an extremely strong commitment device.
The paper illustrates, out of the sample offered the SEED product, 24 per cent took the product up. The lockbox was the most popular commitment device purchased by 20 per cent of individuals who pursued SEED. Followed by 17 per cent choosing the date-based goal (a weak commitment device), whereas 7 per cent choose an amount-based goal (a strong commitment device). Lastly, the remaining 2 per cent opted for automatic transfers to the SEED from another account (a very strong commitment device).
The study claims females who exhibit hyperbolic preferences (with respect to money) are 15.8 per cent more perspective to use a commitment savings device, however, a parallel effect among men is not observed. This outcome is vigorous to include income, assets, education, household composition, and other theoretically significant elements. Ashraf (2006) claims in addition to being female, education and income also influence the take-up of the SEED account. Moreover, his highlights the change in savings is a long-term response as outcomes were evaluated twice over 12 months at 6-month intervals.
According to Ashraf (2006) the imbalance of male to female ratio in committing to a SEED account is due to women in the Philippines classically being in charge for household finances, thus they must be more dedicated to calculating ways to increase their effort to save since their failure impacts an entire household. Although this can be factual, it is imperative to contemplate additional factors which could originate a gender imbalance, e.g. the notion that women on average live longer and thus need to save extra for their retirement.
Moreover, since the SEED accounts are one-person private accounts, married individuals are incapable of jointly saving. It, therefore, puts married couples in a disadvantageous position, as one partner could be saving on behalf of both partners, providing magnification of saving level on part of one gender. In addition, the study fails to provide any contrasting explanations, such as imbalances may exist because males are less committed to savings due to intra-household decisions regarding who holds the power to spend the income. This leaves an open question for further research.
To examine whether a change in saving is, in fact, a long-term response, it would be more desirable to obtain time series data over a long period of time. In a further study, Ashraf (2009) themselves corrected this anomaly and obtained data 2.5 years later only to grasp the one-year effect conveyed in Ashraf (2006) was not continuous in two and a half years. ‘the strong (81%) impact on savings that was observed after 12 months diminishes to 33% after 32 months’
Savings outcomes for individuals who pursued a SEED account was still positive, however, it reduced in magnitude and statistically insignificant. (Ashraf et al., 2009) theorized numerous explanations for the diminished influence of the SEED product. First, although the usage of the SEED account was heterogeneous in intensity, the account was not used continually beyond the first year even for high usage individuals).
The theory behind the preference for commitment proposes that the commitment account may have caused a deviation from low-savings equilibrium; gradually individuals return to the equilibrium they were in before. Bernheim, Ray and Yeltekin (1999) describe how a low asset trap can be exacerbated through self-control problems, but that self-control can be more easily imposed once a certain threshold level of assets is crossed.
It can be theorized the account does, in fact, perform positively. However, needs a proactive bank capable of sustaining interventions to reach a new equilibrium, which small depositors’ banks are unable to do so and may require to be subsidized.
Secondly, it is important to consider perhaps the present self-wins in the long run. The SEED account triggered an unconventionality from a low savings equilibrium, and slowly, individuals found ways to return to the equilibrium they were in before. This is like saying that habits are hard to change.
One of the finest features of the paper is that the researchers always attempted to provide some commendations wherever they experienced an inconsistency or felt re-evaluation may be required. However, in addition to their reconsiderations, there are drawbacks imperative to consider.
The study solitary observes characteristics associated with consumption and the impact of offering the SEED account on the savings rates of individuals. It fails to register the social impact of the product on poverty levels or additional measures of an individual’s well-being. Thus, it is unclear how, and to what extent is saving increasing an individual’s welfare as stated in the motivation of this experiment.
Moreover, although the study benefits from a large sample size to conduct an effective regression analysis, the sample consists of adult bank individuals who have savings accounts and identifiable addresses. This means there exists a high chance for a bias towards richer individuals as they will find it easier to commit to saving more, and thus magnify the impact of the SEED account. Also, fewer observable characteristics predict hyperbolic inconsistency. The only significant variable is those who are less satisfied with their current savings habits.
Again, solely depending on Ashraf’s explanation regarding the gender imbalance in pursuing SEED is unrealistic as other factors may come into play. Cultural and demographical differences may also provide the model with different and complex results. Would the results be the same outside the Philippines, where household systems are heterogeneous and significantly different?
Lastly Ashraf (2006) conversed the prior works in a qualitative way but those can also be reviewed quantitatively through meta-analysis where the data points are individual studies. It can be a beneficial tool to assess and explicate the differences amid outcomes of similar studies concerning inconsistent time preferences.
While Ashraf (2006) covered almost all the aspects of the relevant variables, the outcome of this study leaves numerous open questions which required further research. As previously mentioned, the study fails to register what effect if any does savings balance have on an individual’s welfare?
How exactly is it that people are better off with more savings? Whether the effect of the product truly diminishes overtime without constant reminders? Will different less intense marketing strategies have an impact on the use of savings? And exactly which product generates the outcomes we observed? (i.e., is it the lockbox or the withdrawal restrictions that matter most? What are the costs and benefits of the bank?
Although Ashraf (2006) provides an extremely innovative, concise and rigorously researched study which considers some crucial implication of its variables and the impact of its SEED products the policy recommendations were too straightforward and oversimplified without reasonable hesitation. The gaps that exist without defensible clarity can be filled through continued experimentation of commitment devices and savings product designs. With further investigation of remaining questions, as behavioral economists, we can help individuals fulfill their savings plans and investigate the true efficiency of various commitment devices and the role they play in individuals and institutions welfare over a period.
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