Present Bias In Personal Finance: Why We Choose Today Over Tomorrow

Most people understand that saving money is important. However, when faced with the choice between spending today and saving for tomorrow, many of us end up choosing today. A new phone, a short holiday, or a dinner out feels rewarding in the moment. Saving for retirement, on the other hand, feels distant and therefore less exciting. You may wonder, why is saving so hard? The answer lies in the human tendency to value immediate gains over future potential benefits. This tendency is called present bias.

Table of contents

• What is present bias and temporal discounting?
• Real-life examples of present bias
• The long-term cost of short-term thinking
• Behavioural Fixes

What is present bias and temporal discounting?

Present bias is a behavioural pattern where people tend to value immediate rewards more than potential future rewards. For example, Rs. 500 spent today can feel more satisfying than the thought of having saved that money for the future. Closely linked to this phenomenon is that of temporal discounting. We tend to “discount” the value of money or rewards in the future. For example, receiving Rs. 1,000 today is more attractive than receiving Rs. 1,100 one year later. Even though the future amount may be higher, our mind tends to reduce its importance simply because it is delayed. This bias explains why many people might delay starting investments and put off retirement savings.

Also Read: Impact of Behavioural Biases on Investment Decisions

Real-life examples of present bias

Present bias can play out in various everyday money decisions.

• Skipping SIPs for impulse purchases: Many investors set up a monthly SIP, but when a shopping sale arrives, the SIP might be paused so that extra money can be used for shopping. This decision satisfies today’s urge, but reduces tomorrow’s savings.
• Underfunding retirement: Many people contribute less than needed for their retirement corpus. The comfort of having extra money for current expenses can feel more pressing than the distant need for retirement funds.
• Impulse spending: Seeing a tempting product on sale can often lead to instant buying. The question of whether this affects future goals is rarely considered in the moment.

Present bias makes it difficult to balance short-term comfort with long-term goals.

The long-term cost of short-term thinking

While the effect of present bias may seem small in the moment, the long-term cost can be significant.

• Skipping an SIP for a few months may not feel serious, but, over the years, those skipped investments could add up to a sizeable amount.
• Spending freely in your 20s and 30s may feel natural, but can lead to limited retirement savings later on. Many people struggle to catch up in their 40s and 50s, when the cost of living is higher.
• Short-term spending decisions, when repeated, can lead to a lifestyle where debt increases and financial stress builds up.

This is why experts often emphasise the importance of starting early and staying consistent. Regular investments, even if small, can potentially grow meaningfully over time.

Behavioural Fixes

Present bias is only natural, but it can be managed with some practical fixes.

• Automation: Automate your savings and investments. For example, set up auto-debits for SIPs or recurring deposits. This removes the need to make a fresh decision every month.
• Visualising future goals: Create a clear picture of what you are saving for, such as buying a home or retirement. Visualising these goals may make the future feel more tangible and less distant.
• Goal-linked accounts: Keep separate accounts for different goals. For example, one account for emergencies, another for long-term investing. This way you can avoid dipping into the funds meant for the future.
• Tackling impulse spending: If you want to learn how to stop impulse spending, try the “24-hour rule”. Delay any purchase decision by a day. This pause often reduces the urge to buy immediately.
• Starting retirement planning early: Even if the amount is small, start saving for retirement. Some advisors suggest beginning your investment or savings plan as soon as you start earning. Early habits can reduce the pressure later in life. Moreover, your money gets more time to potentially harness the power of compounding.

These behavioural tools may not eliminate present bias completely, but they make it easier to work towards future goals while also enjoying the present.

Also Read: How Recency Bias Can Impact Mutual Fund

Conclusion

Present bias is a common yet significant challenge in personal finance. It explains why saving can feel so difficult even when we understand its importance. Our mind tends to assign more value to today than tomorrow, leading us to overspend and delay our investments. By understanding this bias and using small fixes like automation and rule-based spending, we may be able to strike a better balance.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.