If you were given the choice between $100 today and $110 in a year’s time, which one would you pick?
If you’re like most people, you’ll decide to have $100 today.
This simple experiment, which has been undertaken countless times in many variations by behavioural economists and psychologists, is about how we perceive the value of the present rather than the future.
The outcome is that most of us value today rather than tomorrow, at varying rates, and it’s this invisible bias that’s behind many problems policymakers are facing. From how to get us to save for retirement to fixing the obesity epidemic, much of it hangs on this simple instinct for the short-term over the long-term.
The reasons for this aren’t necessarily because we’re greedy or have an inability to plan ahead, though the outcomes can cause significant problems, but are typically grounded in three main considerations.
The first is risk and uncertainty. As an extreme example, you know you are alive now but you aren’t 100 per cent certain you’ll be around in the future.
The longer the time period, the higher the risk that you won’t ever benefit from that money – so the less you value receiving it in the future and the more likely you are to want it now.
Another reason is the missed potential of the funds. If you are given $1 in your pocket today, you know you can either use that for consumption now and enjoy the benefits.
A third reason for discounting is inflation.
Discount rates are regularly used by economists for government and business planning, particularly when considering the costs and benefits of choices on a long-term basis, to determine whether projects should go ahead.
As any of those professionals can tell you, the time period under consideration, and the size of the discount applied, can have dramatic impacts on the choice of outcome.
This same process is undertaken by individuals every time they make a decision to benefit themselves today, and how they subconsciously discount the benefits of the future will affect their decisions.
Each person has a different way that they consider the future, and how they discount it, but the fact that we value today more highly is almost universal and sometimes unhelpful.
If you’ve ever wondered why the government is required to withhold superannuation and make it untouchable, and why so many people are still eager to tap into these funds to buy a first home, you’ll see discounting in action.
Younger people, less-educated people and lower-socioeconomic people have consistently found to be more likely to have higher time discount rates. Meaning, they’re likely to more greatly value today over tomorrow.
The phenomenon of having a higher bias for today has been linked to higher likelihood of obesity, debt and smoking. It’s likely those who struggle to pick a long-term approach, when all other things are equal, have a higher propensity to discount the future more.
It has also been described as part of the reason it has become so difficult to make environmental improvements. Typically, environmental policies tend not to have immediate impacts but can result in dramatic long-term improvements. Research from Harvard Law School described this as a “sobering message for policymakers” as the effect of discounting the future means many citizens undervalue these improvements. This can make it a tough sell.
It is an invisible problem that has plagued governments and households for years – and it also explains why people tend to only consider retirement when it’s round the corner even though there is constant proof that having a plan from when you’re young is the best option.
Very few people make additional superannuation contributions and in 2015 one in three pensioners was found to be living below the poverty line.
Understanding this human bias to devalue future funds, however, may be able to be used to benefit ourselves.
While we are less inclined to save today, we’re quite likely to favour the idea of our future self making savings instead.
It’s this very idea now being used by Vision Super has created an n first “save more later” program to encourage workers at Mount Alexander Shire Council to put more money into their superannuation.
The theory behind this is that people are more willing to agree to set money aside that they don’t have yet.
So rather than getting a full pay rise, part of the increase in their future pay packet is used as an additional super contribution and staff were spoken to about why it was critical to make these contributions.
More than 70 per cent of staff opted in and it is now in the process of being included in other enterprise agreements.
It seems part of the answer to this invisible bias is simply making people aware it exists.
Ross Gittins is on leave.