ABSTRACT
This chapter relaxes the standard assumption of consumption independence for intertemporal decision making in two key ways. First, past consumption can impact present utility. For example, in a model of habit formation, habitual behaviors emerge because doing an activity yesterday makes doing it today more desirable. A habit-formation model is applied to understand addictive activities, like drug use, with both time-consistent (i.e., rational addiction) and present-biased consumers. The first half of the chapter concludes with empirical evidence of habit formation in the contexts of voting and tobacco use. Alternatively, anticipation of future consumption can impact present utility. This possibility is explored with a model of anticipatory utility that is applied to make sense of the sign effect and preference for improvement. The chapter concludes with evidence that anticipation of bad future outcomes, or anxiety, can impact decisions related to personal health and investing.
