The “NOW vs.
LATER” effect (or simple time discounting) is quite simple and it can
be illustrated with the following pair of choices:
Choice:
What do you choose between?
A. 100
Euros Now and
B. 110
Euros in two weeks.
Most people choose “A” and
forgo the extra 10 euros for not waiting.
Now, consider the
following choice:
C. 100
Euros in three months from now and
D. 110
Euros in three months and two weeks from now.
In this case, most
people choose “D”.
If we take a look at the
two options from the rationality perspective we see that the options are in
essence identical. In each case there is a 10 Euro premium for waiting another
two weeks.
The fact that preferences
changed from one pair to another is a violation of rationality and is
extremely useful for understanding human nature. In other words it is the “NOW
vs. LATER” effect.
When we have to choose
between a smaller positive outcome now and another bigger positive outcome
later, we take the small one right now. However, when we have to choose between
two future outcomes – one smaller and sooner and one larger and later – we tend
to go for the larger one.
This is because we think
something like this “if I have to wait for three months to get the smaller
reward, then I can also wait for another two more weeks to get the extra
reward.”
The implications of the
“Now vs. Later” effect are quite significant. I would say that the most
important thing is that people are willing to do “the right thing” in
the future and experience difficulties for doing so in the present. In
other words some actions are better to be delayed.
A very nice example comes
from Shlomo Benartzi and Richard H. Thaler with the “Save more tomorrow”
program. In short, people were asked to save more money for retirement (in the
US), but starting at their next pay-raise. By delaying the moment of the actual
saving more money, more people were willing to sing the contract, than if they
would be starting right now.
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