Many people display something like hyperbolic discounting. Some businesses thrive on supporting this sort of short-term excess. For example, several establishments offer payday loans−short-term loans with ultrahigh interest rates designed to be paid off the next time the person is paid.
a) Suppose you were considering opening such a payday loan establishment. Given that hyperbolic discounters often fail to follow through on plans, how could you structure the loans to ensure payment? Use the quasi-hyperbolic model to make your argument. present bias: not gonna have $ to pay back
b) The absolute-magnitude effect suggests that people are much closer to time consistency with regard to larger amounts. How might this explain the difference in the structure of consumer credit (or short-term loans) and banks that make larger loans?
c) Lotteries often offer winners an option of receiving either an annual payment of a relatively small amount that adds up to the full prize over a number of years or a one-time payment at a steep discount. Describe how time inconsistency might affect a lottery winner’s decision. How might the lottery winner view her decision after the passage of time?