Is ‘Living in the Now’ Sabotaging Your Finances? An In-Depth Analysis of Present Bias
The subtle shifts in mindset that can change your financial life
“Procrastination is the art of keeping up with yesterday and avoiding today.”
— Attributed to Wayne Dyer
Imagine that I showed up at your office and offered to buy you lunch. I give you two options: pizza or a salad.
Most people would choose pizza and, in doing so, would be displaying a textbook example of "present bias," which is the human tendency to choose immediate rewards and avoid immediate costs, even if they know that those decisions are not in our best interest in the long run. Choosing pizza over salad exemplifies preferring immediate rewards that come with a long-term cost.
Present bias also works the other way, choosing to avoid immediate costs even if we have to pay more later. A classic example is the college term paper you did not write until the night before it was due. You had weeks to write the paper, but each day you chose to avoid the immediate cost of writing it and paid for that decision with added stress and loss of sleep by leaving it to the last minute.
Present bias is essentially a manifestation of self-control issues. Research has shown that increasing your level of self-control has a number of positive financial benefits, such as saving money from every paycheck, making better financial choices, feeling less anxious about money, and feeling more secure about your financial situation.
Let's dive into how present bias impacts decision-making under two scenarios:
Choices with immediate costs (which is why you procrastinate)
Choices with immediate rewards (which is why you give in to temptation).
We'll also explore whether people are aware in advance that their decision-making will be influenced by self-control issues.
If you do not know in advance that your decision will be impacted by a lack of self-control, then your decisions in those situations are driven purely by the present bias effect.
This means you'll be more likely to procrastinate and give in to temptation.
On the other hand, people who realize they lack self-control have a bias towards taking immediate action. Having a tendency towards acting now rather than later helps avoid procrastination but also makes someone more likely to give in to temptation, doing something they will pay for in the long run.
In simple terms: When dealing with procrastination issues, it is helpful to be aware of your struggles with self-control. But when dealing with issues requiring you to resist temptation, ignorance is bliss—not being aware of your self-control issues means you are less likely to indulge in activities with short-term rewards and long-term costs.
The Impact of Giving in to Temptation on Your Finances
Think of what it feels like after a long stressful day at work. Your boss chewed you out, you're behind on your project deadlines, and road construction added another 30 minutes onto your commute home. When you get home, you have to feed your kids, and you're left with two options: order in, which, with delivery fees and tips, can easily cost more than $60, or make dinner yourself at a fraction of the cost.
Resisting overspending on ordering food requires a tremendous amount of self-control when the last thing you want to do is stand in front of a hot stove after a long day.
Money not only impacts what we can buy and how we can spend our time; it also has a massive impact on our psychological well-being. Financial problems are often cited as one of the leading causes of stress, anxiety, and divorce.
A 2017 paper found that after controlling for income, age, sex, education, and financial literacy, people with a high level of self-control were more likely to feel confident about their current and future position and less anxious when thinking about money.
In summary, a high level of self-control can help someone save more money, make better financial decisions, feel confident in their future, and reduce their level of anxiety. It stands to reason that most of us would live a happier, richer life if we could increase our level of self-control.
But is it possible to do that?
Is self-control something we are born with or something we can learn?
How to Avoid Giving in to Temptation
A 2021 meta-analysis aggregated the research of financial self-control strategies across 29 academic studies to determine how effective they were at helping people save more and spend less. Self-control strategies are a broad concept and can include just about anything you might do to avoid the temptation to overspend.
The researchers break down several different types of self-control strategies, but to simplify their findings, you can think of two strategies to implement financial self-control:
Proactive strategies, which focus on what you can do to avoid tempting situations to overspend in the future.
Reactive strategies, which focus on what you can do to avoid overspending once you are in a tempting situation to spend.
They found that proactive strategies tend to be more effective than reactive strategies. This is an unsurprising result; how often have you been told it's better to be proactive than reactive? Well, I am telling you again, but with data to back up that claim.
Think of it like dieting.
A proactive dieting strategy would be to avoid keeping any junk food in the house. By being proactive, you reduce your reliance on "willpower" to avoid temptation. In the context of saving money, think about situations where you will be tempted to overspend and think of a strategy to avoid that ahead of time.
Let's say a group of friends wants to go out for dinner.
This is a prime situation where you will be tempted to overspend. To avoid paying marked-up costs at a restaurant, maybe you offer to host a dinner party and ask each guest to bring an individual item. Someone gets a bottle of wine, another person brings dessert, and you cook the main course. That's an example of a proactive strategy to practice financial self-control. Anticipate a situation where you will spend too much money and plan to avoid it.
The Impact of Procrastination on Your Finances
Here's a phrase you've heard a thousand times: Time is money.
Here's a more practical way that phrase applies to your financial life. The longer you delay taking action, the more it will cost you. Failing to save and invest for retirement today means you will forgo the benefits of compound interest. The earlier you invest, the more you benefit from compound interest and the less money you need to save. Waiting to invest means you will need to pay one of three costs:
Having to save more money to enjoy the same standard of living in retirement.
Lowering your standard of living in retirement.
Delaying retirement and working longer than you would like.
Financial procrastination also has more immediate and tangible costs. Putting off paying your bills can lead to increased penalties and interest and even impact your credit score, which increases your cost of borrowing in the future.
Time is money; the more you procrastinate, the more you pay.