Date Added: Oct 2009
This paper addresses the role of self-set, non-binding goals as a source of internal motivation to attenuate the self-control problem of a hyperbolic discounter. Agents have linear reference-dependent preferences and endogenously set a goal that serves as the reference point. They face an infinite horizon, optimal stopping problem in continuous time, where there exists an option value of waiting due to uncertainty. The author show that, regardless of whether the agent is sophisticated or naive about his present biasedness, goal-setting attenuates the hyperbolic agent's tendency to undervalue this option and stop too early, but too much reference dependence leads an agent to wait longer than the first best. In particular, reference dependence is strictly worse for a time consistent agent.