WP 2015-11 Risk Preferences, Time Preferences and Smoking Behavior
ABSTRACT: There is a rich theoretical literature in economics which models habit-forming behaviours, of which addiction is the exemplar, but there is a paucity of experimental economic studies eliciting and comparing the preferences that economic theory suggests may differ between addicts and non-addicts. We evaluate a set of incentive compatible risk and time preference experiments conducted on a sample of student smokers and non-smokers at the University of Cape Town in 2012. We adopt a full information maximum likelihood statistical framework, which is consistent with the data generating processes proposed by structural theories and accounts for subject errors in decision making, to explore the relationship between risk preferences, time preferences and addiction. Across different theories and econometric specifications we find no differences in the risk preferences of smokers and non-smokers but do find that smokers discount significantly more heavily than non-smokers. We also identify a nonlinear effect of smoking intensity on discounting behaviour and find that smokers may be more likely to discount hyperbolically than non-smokers, which means they may be more prone to time inconsistency. These results highlight the importance of the theory-experimental design-econometric trinity and have important implications for theories of addiction.