Editing Dynamic inconsistency (section)

==Stylized examples==
*In a game theory context, an announced government policy of never negotiating with terrorists over the release of hostages constitutes a time inconsistency example, since in each particular hostage situation the authorities face the dilemma of breaking the rule and trying to save the hostages. Assuming the government acted consistently in not ever breaking the rule, it would make it irrational for a terrorist group to take hostages. (Of course, in the real world terrorists might not act rationally.)
*Students, the night before an [[exam]], often wish that the exam could be put off for one more day. If asked on that night, such students might agree to commit to paying, say, $10 on the day of the exam for it to be held the next day. Months before the exam is held, however, students generally do not care much about having the exam put off for one day. And, in fact, if the students were made the same offer at the beginning of the [[academic term|term]], that is, they could have the exam put off for one day by committing during registration to pay $10 on the day of the exam, they probably would reject that offer. The choice is the same, although made at different points in time. Because the outcome would change depending on the point in time, the students would exhibit time inconsistency.

{{Anchor|Monetary policy inconsistency}}
*[[Monetary policy]] makers suffer from dynamic inconsistency with [[inflation]] expectations, as politicians are best off promising lower [[inflation]] in the future. But once tomorrow comes lowering inflation may have negative effects, such as increasing [[unemployment]], so they do not make much effort to lower it. This is why [[Central bank#Independence|independent]] [[central bank]]s are believed to be advantageous for a country. Indeed, "a central bank with a high degree of discretion in conducting monetary policy would find itself under constant political pressure to boost the economy and reduce unemployment, but since the economy cannot exceed its potential GDP or its [[natural rate of unemployment]] over time, this policy would instead only lead to higher inflation [[Long run and short run|in the long run]]".<ref>{{cite journal|title=The Evolution of Central Bank Governance Around the World| journal=[[Journal of Economic Perspectives]]| date=Fall 2007 |volume=21 |issue =4| pages =69–90|doi=10.1257/jep.21.4.69| last1=Crowe| first1=Christopher| last2=Meade| first2=Ellen E.| s2cid=154928527| doi-access=free}}</ref> The first paper on this subject was published by [[Finn E. Kydland]] and [[Edward C. Prescott]] in the ''[[Journal of Political Economy]]'' in 1977, which eventually led to their winning the [[Nobel Memorial Prize in Economic Sciences]] in 2004.<ref>{{cite journal | author2-link= Edward C. Prescott |title=Rules Rather than Discretion: The Inconsistency of Optimal Plans |journal= [[Journal of Political Economy]] |volume=85 |issue=3 |date = June 1977 |pages=473–492 |jstor=1830193 | url = https://www.sfu.ca/~kkasa/prescott_77.pdf |doi=10.1086/260580| citeseerx= 10.1.1.603.6853 | author1-link= Finn E. Kydland |last1=Kydland |first1=Finn E. |last2=Prescott |first2=Edward C. |s2cid=59329819 }}</ref> (See also [[Monetary policy credibility]].)
*One famous example in literature of a mechanism for dealing with dynamic inconsistency is that of [[Odysseus]] and the [[Siren (mythology)|Sirens]]. Curious to hear the Sirens' songs but mindful of the danger, Odysseus orders his men to stop their ears with beeswax and ties himself to the [[Mast (sailing)|mast]] of the ship.  Most importantly, he orders his men not to heed his cries while they pass the Sirens; recognizing that in the future he may behave irrationally, Odysseus limits his future agency and binds himself to a [[Commitment device|commitment mechanism]] (i.e., the mast) to survive this perilous example of dynamic inconsistency. This example has been used by economists to explain the benefits of commitment mechanisms in mitigating dynamic inconsistency.<ref>{{cite book |last=Wolf|first=Martin|chapter-url= https://books.google.com/books?id=mpv_P3kmoC4C |title= Why Globalization Works |chapter= The Market Crosses Borders |page= [https://archive.org/details/whyglobalization00wolf/page/91 91] |publisher= Yale University Press |year= 2004 |location= New Haven, CT |isbn= 978-0-300-10252-9 |author-link= Martin Wolf |url-access= registration |url= https://archive.org/details/whyglobalization00wolf }}</ref>
*A curious case of dynamic inconsistency in psychology is described by {{harvtxt|Read|Loewenstein|Kalyanaraman|1999}}. In the experiment, subjects of the study were offered free rentals of movies which were classified into two categories - "lowbrow" (e.g., ''[[The Breakfast Club]]'') and "highbrow" (e.g., ''[[Schindler's List]]'') - and researchers analyzed patterns of choices made. In the absence of dynamic inconsistency, the choice would be expected to be the same regardless of the delay between the decision date and the consumption date. In practice, however, the outcome was different. When subjects had to choose a movie to watch immediately, the choice was consistently lowbrow for the majority of the subjects. But when they were asked to pick a movie to be watched at later date, highbrow movies were chosen far more often. Among movies picked four or more days in advance, over 70% were highbrow.
*People display a consistent bias to believe that they will have more time in the future than they have today. Specifically, there is a persistent belief among people that they are "unusually busy in the immediate future, but will become less busy shortly". However, the amount of time you have this week is generally representative of the time you have in future weeks. When people are estimating their time and when deciding if they will make a commitment, they anticipate more "time slack" in future weeks than the present week. Experiments by {{harvtxt|Zauberman|Lynch|2005}} on this topic showed that people tend to discount investments of time more than money. They nicknamed this the "Yes...Damn!" effect because people tend to commit themselves to time-consuming activities like traveling to a conference under the false impression that they will be less busy in the future.<ref>{{cite news|first=Wayne |last=McIntyre| title=Watch Out for the 'Yes, Damn!' Effect. It's a Credibility Killer.|url=https://funnelblog.wordpress.com/2011/12/18/watch-out-for-the-yes-damn-effect-its-a-credibility-killer |work =FunnelBoard Blog|date=December 18, 2011}}</ref><ref>{{cite journal|title= Resource Slack and Propensity to Discount Delayed Investments of Time Versus Money| journal= [[Journal of Experimental Psychology: General]]| date= February 2005| volume= 134| issue= 1| pages= 23–37| doi= 10.1037/0096-3445.134.1.23| pmid= 15702961| url= https://faculty.fuqua.duke.edu/~jglynch/Working%20Papers/Zauberman%20and%20Lynch%20Final.pdf| archive-url= https://web.archive.org/web/20111104122319/http://faculty.fuqua.duke.edu/~jglynch/Working%20Papers/Zauberman%20and%20Lynch%20Final.pdf| archive-date= 2011-11-04| last1= Zauberman| first1= Gal| last2= Lynch| first2= John G.}}</ref><ref>{{cite journal|title= When Do You Want It? Time, Decisions, and Public Policy|journal= Journal of Public Policy & Marketing|date= Spring 2006|volume= 25|issue= 1|pages= 67–78|url= https://faculty.fuqua.duke.edu/~jglynch/articles/Lynch%20and%20Zauberman%202006%20JPPM.pdf|doi= 10.1509/jppm.25.1.67|archive-url= https://web.archive.org/web/20111104122455/http://faculty.fuqua.duke.edu/~jglynch/articles/Lynch%20and%20Zauberman%202006%20JPPM.pdf|archive-date= 2011-11-04|citeseerx= 10.1.1.167.4955|last1= Lynch|first1= John G.|last2= Zauberman|first2= Gal|s2cid= 13887597}}</ref>