When you’re snuggled up on the couch binging your favorite shows, the immediate reward of remaining cozied up seems to far outweigh the delayed reward of exercise. The cognitive bias that influenced your decision to stay home is called present bias, and it affects more than just your fitness routine—it can influence your financial behaviors as well. So, what exactly is present bias, and what can we do about it?
What Is Present Bias?
Cognitive biases are tendencies to think in certain ways that can lead to inaccurate conclusions. One example of a cognitive bias is present bias, which is the tendency to give more weight to present information than future information. It may make you more likely to prefer an immediate reward over a delayed reward, even if the delayed reward is larger.
This bias can lead to sub-optimal decision-making, as you may ignore future consequences in favor of immediate gratification. Behavioral economists have studied present bias extensively, and it is thought to play a role in many decisions, from simple choices, like what to eat for dinner, to more complex decisions, like whether to save for retirement.
Ways to Overcome Present Bias
As humans, it’s natural to be more concerned about the present than the future. We want what we want, and we want it now! Unfortunately, present bias can lead us to make choices that are not in our long-term best interests.
For example, you may skip a workout because you don’t feel like it today, even though you know it’s vital for your health. Or you may spend money on a new outfit instead of saving for a rainy day.
Fortunately, there are ways to overcome present bias and make better choices for your long-term well-being. Here are three strategies:
1. Set Financial Goals and Make Plans
More than in any other area of your life, you need to plan your finances well in advance. So it’s critical to set goals and make plans to achieve them if you want to overcome present bias.
When it comes to goal-setting, use SMART goals (specific, measurable, attainable, relevant, time-bound) to help you create ambitious but attainable goals that help you make progress each month.
2. Celebrate Small Victories
Learn to celebrate small victories. Instead of focusing on the immediate gratification of a purchase, think about how you could better use your money to improve your financial future. Be sure to celebrate each step in the process of achieving your goals.
Let’s say you’ve been working hard to save up for a down payment on a house. Celebrating when you reach your goal of $10,000 in savings is a great way to stay motivated and focused on your long-term goal.
In this way, overcoming present bias is about training your brain to focus on the future benefits of your decisions rather than the immediate pleasure.
3. Practice Emotional Regulation
Impulsive decision-making can be detrimental to your financial well-being. One way to overcome present bias is to practice emotional regulation. Learning to control your emotions and impulses will help you make more rational decisions.
Take the time to consider future consequences before making any decisions.
While it may be challenging to overcome present bias, it is crucial to be aware of its impact on your financial life. By making an effort to consider future consequences, you can make more informed decisions about your money and improve your financial well-being.
Need more support? Julep pairs psychology with financial management techniques to help you change your money mindset.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.