July 26, 2011
The Bane of Financial Plans
There’s something about getting a will together, checking in on one’s retirement fund, or finally paying down that credit card that causes the procrastination gene to kick in.
In this recent video on CBS, Harvard behavioral economist David Laibson explains the reason for this tendency: “present bias.” Humans put more weight on the present than on the future, so it’s easier to delay the hard work until later. No surprise that’s true for financial tasks, which can be overwhelming, emotional, complex, or unpleasant.
“We humans have wonderful intentions about what we’re going to do,” he explains in this video. But when the time comes to do it, “We decide once again to push it further into the future.”
Laibson uses a simple example from a well-known 1980s experiment in which researchers asked people at Amsterdam workplaces whether they would want a healthy fruit snack, an indulgent chocolate bar, or potato chips next week. Most chose fruit.
On the day they were to receive the snack, the researchers said they lost the workers’ previous selection and asked them to pick again. The preferences flipped, and most chose chocolate.
Laibson goes on to apply the fruit/chocolate concept to financial decisions. The video was recorded last month, but the topic – human behavior – never gets old for Squared Away.