We live in the present, we are temporary discounters. We live our own cognitive biases: present, self-control, optimism, inertia, herd effect … There are proposals that emerge from Behavioral Economics that will help us to make the optimal decisions for us.
And we are going to talk about our future and make it a reality.
Deferred reward means immediate sacrifice of cosumption for a future reward. Our different remmuneration concepts are referred: annual salary (paid monthly), annual variable, multiyear variable, shares, and our employee benefits: retirement, health, life risk…
We life the present, we are temporal discounters. Temporal discounting suggests that the deferrement of a reward will lead to the perception of a reduction in its value. Furthermore, the perceived value for the same reward gets smaller with time.
How can we better understand these cognitive biases? Can they result in making not optimal decisions? We can do these tihnks through the rigour of social sciences, in this case from economic and psychological experiments.
We don´t think about the long term
There is an experiment that clearly shows us this bias. Source: Read and van Leeuwen (1998). People were asked, one week before a meeting, to choose if they would like fruit or chocolates during the break. 74% chose fruit for their future self. But a week after, during the break, in the reality of the present, 70% chose the chocolates.
What implications does this result have, for example, for long term savings? A lot. We think we are able to save next week or next year and we are indulgent with our present self. We know what we have to do but we lack self control which is the main obstacle for our savings.
Cognitive biases can be among others:
- Myopia bias – We tend to be focused on the present and in immediate consumption tan in the future, whether close o far away. For example, we choose an immediate salary increase better than training courses that will generate an increase in a future salary.
- Optimism bias – We have the believe that everything is going to be alright in the future.
- Self-control bias – Everybody thinks that everything is under their control.
- Hyberbolic discounting – We understimate the distant future events, and suddenly, the value increases when the events are closer.
Walter Mischel in the late 60s developed the Marshmallow Tests:
- They tried to study the effects of deferring gratuities in children. In these experiments, the children were asked to choose between a small reward for immediate gain or double if they were able to delay the reward by a quarter of an hour.
- In the follow-up of the boys who had performed the experiment, Mischel and his team found that those children who had been able to delay obtaining the reward tended, between the ages of twenty-seven and thirty-two, to score better in a number of measures such as school grades, body mass index, self-esteem, or resistance to frustration or stress.
The past and the future are unreal, only the present exists. But the future is always an opportunity and if we don´t think about what’s to come we won’t have a future. This is the Galbraith idea, you know, an economist.