Short Answer

Contrasting Reactions to Future Income Shocks

Imagine two individuals, Alex and Ben, both learn today that they will receive a significant, permanent pay cut one year from now. Alex immediately reduces their current spending, while Ben's spending remains unchanged until the pay cut actually happens. Based on these behaviors, identify which individual is likely a 'consumption-smoother' and which exhibits 'present bias'. Justify your answer by explaining the core reasoning behind each individual's decision-making process.

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Updated 2025-10-08

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