A Cue-Theory of Consumption

Abstract

Psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue-based complementarities: the presence of the cue raises the marginal utility derived from consumption. In this paper, such dynamic preferences are embedded in a rational choice model. Behavior that arises from this model is characterized by endogenous cue sensitivities, costly cue-management, commitment, and cue-based spikes in impatience. The model is used to understand addictive/habit-forming behaviors and marketing. The model explains why preferences change rapidly from moment to moment, why temptations should sometimes be avoided, and how firms package and position goods.

'Twas four weeks before Christmas: Retail sales and the length of the Christmas shopping season

“…The latter case is consistent with a model such as Laibson's "cue theory" (Laibson 2001) or with an intertemporal increasing-returns shopping technology.…”

“…1 The number of days each year for 1967-2000 is plotted in Figure 1. (Leap years prevent the number of days from following a regular 7-year cycle.)…”

A Dual-Self Model of Impulse Control

“…Most existing work on cues, such as Laibson [2001] and Bernheim and Rangel [2004], abstracts away from self-control costs. Laibson analyzes a "rational addiction" model-that is, a model with a single, fully rational, agent -in a setting where there are two cues, namely "green lights " and "red lights," and the utility from engaging in the addictive utility when a given light is on depends on one's past behavior under that particular light.…”

The Evolutionary Foundations of Preferences

“…Gul and Pesendorfer [64] present a model of such preferences centered on the assumption that resisting tempting alternatives is costly. Laibson [79] examines a model in which instantaneous utilities adjust in response to external cues. Our interest here is not so much the mechanism by which this interaction between the set of alternatives and the utility of particular alternatives is generated, but rather the question of why evolution might have endowed us with such preferences in the first place.…”