Addiction and Cue-Triggered Decision ProcessesBy B. DOUGLAS BERNHEIM AND ANTONIO RANGEL*We propose a model of addiction based on three premises: (i) use among addicts isfrequently a mistake; (ii) experience sensitizes an individual to environmental cuesthat trigger mistaken usage; (iii) addicts understand and manage their susceptibil-ities. We argue that these premises find support in evidence from psychology,neuroscience, and clinical practice. The model is tractable and generates a plau-sible mapping between behavior and the characteristics of the user, substance, andenvironment. It accounts for a number of important patterns associated withaddiction, gives rise to a clear welfare standard, and has novel implications forpolicy. (JEL D01, D11, H20, H21, H23, H31, I12, I18, K32)According to clinical definitions, substanceaddiction occurs when, after significant expo-sure, users find themselves engaging in compul-sive, repeated, and unwanted use despite clearlyharmful consequences, and often despite astrong desire to quit unconditionally (see, e.g.,the American Psychiatric Association’s Diag-nostic and Statistical Manual of Mental Disor-ders, known as DSM-IV). There is widespreadagreement that certain substances have addic-tive properties,1and there is some debate as towhether formal definitions of addiction shouldbe expanded to include other substances (suchas fats and sugars) and activities (such as shop-ping, shoplifting, sex, television viewing, andinternet use).The consumption of addictive substancesraises important social issues affecting mem-bers of all socioeconomic strata.2Tens of mil-lions of Americans use addictive substances.Nearly 25 million adults have a history of alco-hol dependence, and more than five millionqualify as “hard-core” chronic drug users. Esti-mates for 1999 place total U.S. expenditures ontobacco products, alcoholic beverages, cocaine,heroin, marijuana, and methamphetamines atmore than $150 billion, with still more spent oncaffeine and addictive prescription drugs. Esti-mated social costs (health care, impaired pro-ductivity, crime, and so forth) total more than* Bernheim: Department of Economics, Stanford Uni-versity, Stanford, CA 94305-6072, and NBER (e-mail:[email protected]); Rangel: Department ofEconomics, Stanford University, Stanford, CA 94305, andNBER (e-mail: [email protected]). We thankGeorge Akerlof, Gadi Barlevy, Michele Boldrin, Kim Bor-der, Samuel Bowles, Colin Camerer, Luis Corchon, DavidCutler, Alan Durell, Dorit Eliou, Victor Fuchs, Ed Glaeser,Steven Grant, Jonathan Gruber, Justine Hastings, Jim Hines,Matthew Jackson, Chad Jones, Patrick Kehoe, NarayanaKocherlakota, Botond Koszegi, David Laibson, Darius Lak-dawalla, Ricky Lam, John Ledyard, George Loewenstein,Rob Malenka, Ted O’Donahue, David Pearce, ChristopherPhelan, Wolfgang Psendorfer, Edward Prescott, MatthewRabin, Paul Romer, Pablo Ruiz-Verdu, Andrew Samwick,Ilya Segal, Jonathan Skinner, Stephano de la Vigna, AndrewWeiss, Bob Wilson, Leeat Yariv, Jeff Zwiebel, seminarparticipants at UC–Berkeley, Caltech, Carlos III, Darmouth,Harvard, Hoover Institution, Instituto the Analysis Eco-nomico, LSE, Michigan, NBER, Northwestern, UCSD,Yale, Wisconsin, SITE, Federal Reserve Bank of Minneap-olis, and the McArthur Preferences Network for usefulcomments and discussions. We also thank Luis Rayo,Daniel Quint, and John Hatfiled for outstanding researchassistance. Rangel gratefully acknowledges financial sup-port from the NSF (SES-0134618) and thanks the HooverInstitution for its financial support and stimulating researchenvironment. This paper was prepared in part while B.Douglas Bernheim was a Fellow at the Center for AdvancedStudy in the Behavioral Sciences (CASBS), where he wassupported in part by funds from the William and FloraHewlett Foundation (Grant No. 2000-5633).1Eliot Gardner and James David (1999) provide thefollowing list of 11 addictive substances: alcohol, barbitu-rates, amphetamines, cocaine, caffeine and related methyl-xanthine stimulants, cannabis, hallucinogenics, nicotine,opioids, dissociative anasthetics, and volatile solvents.2The statistics in this paragraph were obtained from thefollowing sources: Center for Disease Control (1993), Na-tional Institute on Drug Abuse (1998), National Institute onAlcohol Abuse and Alcoholism (2001), Office of NationalDrug Control Policy (2001a, b), and U.S. Census Bureau(2001). There is, of course, disagreement as to many of thereported figures.1558$300 billion per year. On average over 500,000deaths each year are attributed directly to ciga-rettes and alcohol.Public policies regarding addictive sub-stances run the gamut from laissez-faire to tax-ation, subsidization (e.g., of rehabilitationprograms), regulated dispensation, criminaliza-tion, product liability, and public health cam-paigns. Each alternative policy approach haspassionate advocates and detractors. Economicanalysis can potentially inform this debate, butit requires a sound theory of addiction.This paper presents a new theory of addictionbased on three central premises: first, useamong addicts is frequently a mistake; second,experience with an addictive substance sensi-tizes an individual to environmental cues thattrigger mistaken usage; third, addicts under-stand their susceptibility to cue-triggered mis-takes and attempt to manage the process withsome degree of sophistication. We argue thatthese premises find strong support in evidencefrom psychology, neuroscience, and clinicalpractice. In particular, research has shown thataddictive substances systematically interferewith the proper operation of an important classof processes which the brain uses to forecastnear-term hedonic rewards (pleasure), and thisleads to strong, misguided, cue-conditioned im-pulses that often defeat higher cognitive control.We provide a parsimonious representation ofthis phenomenon in an otherwise standardmodel of intertemporal decision-making. Spe-cifically, we allow for the possibility that, uponexposure to environmental cues, the individualmay enter a “hot” decision-making mode inwhich he always consumes the substance irre-spective of underlying preferences, and we as-sume that sensitivity to cues is related to pastexperiences. The individual may also operate ina “cold” mode, wherein he considers all alter-natives and contemplates all consequences, in-cluding the effects of current choices on thelikelihood of entering the hot mode in thefuture.3As a matter