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Present bias and health

Abstract

This study uses a dynamic discrete choice model to examine the degree of present bias and naivete about present bias in individuals’ health care decisions. Clinical guidelines exist for several common chronic diseases. Although the empirical evidence for some guidelines is strong, many individuals with these diseases do not follow the guidelines. Using persons with diabetes as a case study, we find evidence of substantial present bias and naivete. Counterfactual simulations indicate the importance of present bias and naivete in explaining low adherence rates to health care guidelines.

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Notes

  1. Fang and Wang (2015) develop methodologies for both finite and infinite time horizons. Here, like the empirical analysis in that paper, we assume a finite horizon with a maximum age of 100.

  2. For a formal discussion and technical details of the identification and estimation method, see Fang and Wang (2015).

  3. We know from the standard theories of discrete choice that we have to normalize the utility for the reference alternative to 0, so without loss of generality we set \(u_{0}^{\ast } \left (x,\mathbf {\varepsilon } \right ) = 0\) for all \(x\in \mathcal {X}\).

  4. Conditional Independence Assumption:

    $$\begin{array}{@{}rcl@{}} \pi (x_{t + 1},\mathbf{\varepsilon}_{t + 1}|x_{t},\varepsilon_{t},d_{t}) &=&q(\mathbf{\varepsilon}_{t + 1}|x_{t + 1})\pi (x_{t + 1}|x_{t},d_{t}) \\ q(\mathbf{\varepsilon}_{t + 1}|x_{t + 1}) &=&q(\mathbf{\varepsilon} ). \end{array} $$

    Extreme Value Distribution Assumption: εt is i.i.d Type I extreme value distributed.

  5. Formally, the Exclusion Restriction assumption says that there exist state variables \(x_{1}\in \mathcal {X}\) and \(x_{2}\in \mathcal {X}\ \)with x1x2, such that (1) for all \(i\in \mathcal {I},\) ui (x1) = ui (x2); and (2) for some \(i\in \mathcal {I}\), π (x|x1,i)≠π (x|x2,i).

  6. To check the robustness of our findings, we set Adherence to one if at least two or four of the five questions were answered affirmatively. The results are qualitatively similar.

  7. The total cognition summary score is generated in the RAND version of HRS. The total word recall summary variables sum the immediate and delayed word recall scores. The mental status summary sums the scores for serial 7’s, backwards counting from 20, and object, date, and President/Vice-President naming tasks. The total cognition score sums the total word recall and mental status summary scores, resulting in a range of 0-35. This score has been used in the literature as a good measure of cognitive ability.

  8. In robustness checks not shown, we set LowCog to one when the score is below 10 or 15, and the results are qualitatively similar.

  9. In the structural but not in the reduced form analysis presented below, we discretize LogIncome to estimate state transitions and utility and time preference; we set the person’s instantaneous utility when dead to zero.

  10. https://www.cdc.gov/diabetes/pdfs/data/statistics/national-diabetes-statistics-report.pdf, accessed 10/01/17.

  11. There might be some future non-related costs. For example, increased life expectancy resulting from increased adherence could lead to an increase in the number of other diseases (e.g. Alzheimer’s disease). The increase in adherence rates therefore might not necessarily be cost-saving when considering from a societal perspective.

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Correspondence to Yang Wang.

Additional information

Partial support for this research came from a grant from the National Institute on Aging to Duke University (NIA grant R01-AG017473).

Appendix

Appendix

This appendix follows Section 2 and provides more details on the identification and estimation of the dynamic discrete choice model. Specifically, given the Extreme Value Distribution assumption, the probability of action i being chosen given x, Pi,t(xt), is:

$$ P_{i, t}(x_{t}) =\Pr \left[W_{i, t}\left( x_{t}\right) +\varepsilon_{i, t}\geq W_{j, t}\left( x\right) +\varepsilon_{j, t}, \forall j\neq i \right] =\frac{ \exp \left[W_{i, t}\left( x_{t}\right) \right]} {{\sum}_{j = 0}^{1}\exp \left[ W_{j, t}\left( x_{t}\right) \right]}. $$
(9)

While W, defined in (4), is not observable, actual choice probabilities Pi,t (xt) are observable in the data and can be used to infer W.

With the choice-specific value function of the next-period self perceived by the current self Zi,t+ 1 (xt+ 1), defined in (5), the current self’s perception of her future self’s choice, σ, can be defined as

$$\begin{array}{@{}rcl@{}} \sigma\left( x_{t + 1},\varepsilon_{i, t + 1}\right) &=&{ arg\max_{i\in \mathcal{I}}}\left[ u_{i, t + 1}\left( x_{t + 1}\right) +\varepsilon_{i, t + 1}+{\tilde{\beta}\delta \sum\limits_{x_{t + 2}\in \mathcal{X}}{V_{t + 2}(}}x_{t + 2} {)\pi (}x_{t + 2}{{|x_{t + 1}, i)}}\right] \\ &=&{arg\max_{i\in \mathcal{I}}}\left[ Z_{i, t + 1}\left( x_{t + 1}\right) +\varepsilon_{i, t + 1}\right] . \end{array} $$

Then the probability perceived by the current period self of choosing alternative i by the next period’s self when the next period’s state, again assuming an Extreme Value Distribution, is xt+ 1, \(\tilde {P}_{i, t + 1}\left (x_{t + 1}\right )\), is:

$$\begin{array}{@{}rcl@{}} \tilde{P}_{i, t + 1}\left( x_{t + 1}\right) &=&\Pr \left[ \sigma\left( x_{t + 1},\mathbf{\varepsilon}_{t + 1}\right) =i\right] \\ &=&\Pr \left[Z_{i, t + 1}\left( x_{t + 1}\right) +\varepsilon_{i, t + 1}\geq Z_{j, t + 1}\left( x_{t + 1}\right) +\varepsilon_{j, t + 1},\forall j\neq i\right] \\ &=&\frac{\exp \left[ Z_{i, t + 1}\left( x_{t + 1}\right) \right]} {{\sum}_{j = 0}^{1}\exp \left[ Z_{j, t + 1}\left( x_{t + 1}\right) \right]} . \end{array} $$
(10)

The distinction between \(\tilde {P}\) and P is that the sophisticated present-biased decision-maker knows the extent of her actual future present bias; by contrast, the naive person underestimates the extent of her present bias. That is, she thinks her β is larger than it actually will be. For sophisticated persons, \(\tilde {P}= P\); for naive ones, \(\tilde {P} \neq P\).

With non-stationarity and a finite horizon, at t = T, when the continuation value is zero, there is no distinction among W, Z, V, and u:

$$W_{i, T}=Z_{i, T}=V_{i, T}=u_{i, T}, $$

which, according to the Extreme Value Distribution assumption, leads to:

$$ V_{T}=\ln {\sum\limits_{i\in \mathcal{I}}\exp [Z_{i, T}]}=\ln {\sum\limits_{i\in \mathcal{ I}}\exp [u_{i, T}]}. $$
(11)

Combining (11) and (5) yields Zi,T− 1. Given the link between Zi,T− 1 and VT− 1, using backward induction, Vt+ 1 can be determined, which in turn relates to Wi,t (4), and then to Pi,t (xt) (9). By this reasoning, we link instantaneous utility u to P, which is observable in the data. Once this relationship between u and P is established empirically from the choice probabilities (Pi,t (xt)) and transition probabilities (π (xt+ 1|xt,i)) for all \(x\in \mathcal {X}\) and for i = (0, 1), we can estimate the utility parameters for a given \(\left \langle \beta ,\tilde {\beta },\delta \right \rangle \).

The relationship between Zi,t and Vt can be described in three steps. First, combining (5) and (6) yields

$$ V_{i, t + 1}\left( x_{t + 1}\right) =Z_{i, t + 1}\left( x_{t + 1}\right) +\left( 1- \tilde{\beta}\right) \delta {\sum\limits_{x_{t + 2}\in \mathcal{X}}{V_{t + 2}(}}x_{t + 2}{ )\pi (}x_{t + 2}{{|x_{t + 1}, i)}.} $$
(12)

Given (12), (7) can be rewritten as:

$$\begin{array}{@{}rcl@{}} V_{t + 1}\left( x_{t + 1}\right) &=&\mathrm{E}_{\varepsilon_{t + 1}}\left[ V_{\sigma\left( x_{t + 1},\mathbf{\varepsilon}_{t + 1}\right), t + 1} \left( x_{t + 1}\right) +\varepsilon_{\sigma\left( x_{t + 1}, \mathbf{\varepsilon}_{t + 1}\right), t + 1}\right] \\ &=&\mathrm{E}_{\mathbf{\varepsilon}_{t + 1}}\left[ \begin{array}{c} Z_{\sigma\left( x_{t + 1},\mathbf{\varepsilon}_{t + 1}\right), t + 1} \left( x_{t + 1}\right) +\varepsilon_{\sigma\left( x_{t + 1}, \mathbf{\varepsilon}_{t + 1}\right), t + 1} \\ +\left( 1-\tilde{\beta}\right) \delta {{\sum}_{x_{t + 2}\in \mathcal{X}}{V_{t + 2}(} }x_{t + 2}{)\pi (}x_{t + 2}{{|x_{t + 1}, \sigma\left( x_{t + 1},\mathbf{ \varepsilon}_{t + 1}\right) )}} \end{array} \right] \\ &=&\mathrm{E}_{\mathbf{\varepsilon}_{t + 1}}{\max_{i\in \mathcal{I}}}\left[ Z_{i, t + 1}\left( x_{t + 1}\right) +{\varepsilon}_{i,t + 1}\right] \\ &&+\left( 1-\tilde{\beta}\right) \delta \mathrm{E}_{\mathbf{\varepsilon} _{t + 1}}{\sum\limits_{x_{t + 2}\in \mathcal{X}}{V_{t + 2}(}}x_{t + 2}{)\pi (}x_{t + 2}{{ |x_{t + 1}, \sigma\left( x_{t + 1},\mathbf{\varepsilon}_{t + 1}\right) )}} \\ &=&\mathrm{E}_{\mathbf{\varepsilon}_{t + 1}}{\max_{i\in \mathcal{I}}}\left[ Z_{i, t + 1}\left( x_{t + 1}\right) +{\varepsilon}_{i,t + 1}\right] \\ &+&\left( 1-\tilde{\beta}\right) \delta \sum\limits_{i\in \mathcal{I}}\tilde{P} _{i, t + 1}\left( x_{t + 1}\right) {\sum\limits_{x_{t + 2}\in \mathcal{X}}{V_{t + 2}(}} x_{t + 2}{)\pi (}x_{t + 2}{{|x_{t + 1}, i)}}. \end{array} $$
(13)

Given the Extreme Value Distribution assumption,

$$ \mathrm{E}_{\mathbf{\varepsilon}_{t + 1}}{\max_{i\in \mathcal{I}}} \{Z_{i, t + 1}(x_{t + 1})+\varepsilon_{i,t + 1}\}=\ln \left\{ \sum\limits_{i\in \mathcal{I}}\exp \left[ Z_{i, t + 1}\left( x_{t + 1}\right) \right] \right\}. $$
(14)

Combined with (14) and (10), (13) can be rewritten as

$$\begin{array}{@{}rcl@{}} &&V_{t + 1}\left( x_{t + 1}\right) =\ln \left\{ \sum\limits_{i\in \mathcal{I}}\exp \left[ Z_{i, t + 1}\left( x_{t + 1}\right) \right] \right\} \\ &&+\left( 1-\tilde{\beta}\right) \delta {\sum}_{i\in \mathcal{I}}\frac{\exp \left[Z_{i, t + 1}\left( x_{t + 1}\right) \right]} {{\sum}_{j = 0}^{1}\exp \left[ Z_{j, t + 1}\left( x_{t + 2}\right) \right]} {\sum\limits_{x_{t + 2}\in \mathcal{X}}{V_{(t + 2)}(}} x_{t + 2}{)\pi (}x_{t + 2}{{|x_{t + 1}, i)}}, \end{array} $$
(15)

which relates Zi,t to Vt, a relationship that makes backward induction possible.

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Wang, Y., Sloan, F.A. Present bias and health. J Risk Uncertain 57, 177–198 (2018). https://doi.org/10.1007/s11166-018-9289-z

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Keywords

  • Hyperbolic discounting
  • Present bias
  • Naivete
  • Time preference
  • Diabetes
  • Adherence

JEL Classifications

  • I12
  • D90