Present bias: why short-term rewards feel so good

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 going to the gym. 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 believe we’re right about something without fact-checking ourselves. 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 one, even if the one is greater.   

This bias can lead to decisions that make you feel good right now but won’t necessarily make you feel good later. Behavioral economists have studied present bias extensively, and it plays 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 not in our long-term best interests.   

For example, you may order lunch because you don’t feel like cooking today, even though you already have the groceries in your fridge. 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 financial wellness. Here are three strategies:  

Set financial goals and make plans 

You need to plan your finances more than in any other area of your life. Setting goals and planning to achieve them is critical if you want to overcome present bias. This is true for the drinks you want to have at happy hour this week and for the home you want to buy at 30.   

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.   

For example, instead of having the goal: “I want to pay my student loans off early,” reframe it to: “I want to pay 20% more on each student loan payment every month for five years.”  

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. The $100 you spend for a new outfit for a friend’s wedding could be an extra $100 put towards boosting your emergency fund. 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 $10,000 in savings goal 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.  

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. When you find yourself really wanting to buy something, check in with your emotions: how are you feeling in that moment? How do you think you’ll feel immediately after making that purchase? How about after a week? A month? Or even a year? By checking in with your feelings and financial goals, you can ensure that your present choices align with your best interests. When you’re about to make an impulsive purchase remember, more likely than not, it will still be there after you take the time to decide if you really want it.   

The bottom line 

While it may be challenging to overcome present bias, knowing its impact on your financial life is crucial. By making an effort to prioritize “future-you”, you can make more informed decisions about your money and improve your financial wellness.