The Economics of New Years Resolutions

Most people wouldn’t connect making New Year’s resolutions and economics. But in fact economists talk a lot about commitment and the circumstances in which commitment doesn’t happen and the circumstances when it does. In particular, in macroeconomics commitment comes up in terms of what economists call “credibility” and how commitment mechanisms can enhance credibility.


So what insights can we gain from economics regarding New Year’s resolutions? First, the concept of “time inconsistency” is an important contribution that economics can make here. What “time inconsistency” (or what is sometimes called “dynamic inconsistency”) says is that what seems like a good thing in the long term might not seem such a good thing in the short term, so you decide not to do what is best in the long term to get short term gains when you know that what matters is the long term and not the short term. Once you succumb to the short term benefits you’re back at square one, and not getting the long term benefits.

A great example of this is quitting smoking. In the long term you know that quitting smoking is good for you – it extends your life and reduces your chances of getting all sorts of life-threatening medical conditions, plus costs quite a bit of money when you add up the costs of cigarettes over time. In the short term though having that one smoke will give you short term benefits that you think will outweigh the costs, but of course this is inconsistent with your long term goals and obvious benefits. This is a perfect example of “time inconsistency”. There are other very obvious examples of “time inconsistency” likely in all our New Years resolutions – things like losing weight, getting fit, and saving more money.

The nearest analogy to the “time inconsistency” problem of quitting smoking or losing weight for an economist is for an inflation-prone central bank to quit printing or creating money when they’ve been used to doing this, perhaps for political reasons. The solution in economics is to create inflation targets, which act as a commitment mechanism, make the central bank independent of the political process and/or to appoint a central banker who is extremely conservative.

So what are the analogous solutions an economist would suggest for quitting smoking or losing weight? Commitment mechanisms are rules that cause you to commit to doing certain things – for example, having rules to avoid triggers to smoke ( - cut down on coffee or drink tea instead) or to avoid bars or things that are complimentary to cigarettes. The analogous action to making the central bank independent of government might be to only associate with other people who don’t smoke, as this will also likely increase the likelihood of quitting for good. There is no direct equivalent for appointing a conservative central banker, but I would suggest that the nearest equivalent would be to continue to focus on the long-term gains and try and remove any thought of the short-term pleasure of smoking, so here perhaps make a log for each day that you’re still on track to meet your long term goals. Of course there are also those anti-smoking drugs such as Xyban or Chantix which can help if taken for a period of time.

But in fact the best way to actually achieve whatever your New Year’s resolutions are is to keep on reminding yourself of the long-term benefits of what you’re trying to achieve. Write your resolutions on a sticky note and put them on your bathroom mirror, and keep on reminding yourself of the logic that you laid out when originally making those resolutions. That way you remind yourself of the long term gains and are less tempted to be derailed by the short term temptations.

At any rate good luck on those resolutions!!