Monday, December 17, 2012

Commitment Devices

The other day, ran into this person who had signed up for a yearlong plan at the local fitness center for a substantial fee. Given that his apartment complex offered the same fitness facilities for free, I wondered why he had to spend all this money. His rationale was that the fact he paid up would motivate him to actually go through the fitness program and in the process, achieve his goal of losing some weight. It stuck me rather odd - until I started thinking about it. There are enough examples of people signing up for such external devices to ensure desired outcomes in future and it comes down to our inability to rationally compute the future returns from a cost incurred in the current period. The rational agent computing the Net Present Value of future benefits is good for text books but as usually happens in Economics, fails spectacularly in practice. Turns out that this is not all that uncommon - there is even some research in Economics around this.
These mechanisms, which serve to nudge us towards actions that we would otherwise avoid, are called 'Commitment Devices'. Think of them as self-preservation devices employed by the future self on the current self to ensure that the actions of the current self do not harm the future self. It is always tempting to eat the extra cake today since the marginal utility to the current self is almost always much higher than the disutility the cake would do to the future self. To keep the current self from eating the cake, imagine the future self from employing a commitment device which could be something like a financial penalty that kicks in every time you break a dietary restriction.
And the full year gym subscription is one such commitment device - the friendly gym next door has already figured that out and lured you into one such contract.