4 September 2013

We Are Willing to do the Right Thing, but Only in the Future - NOW Vs. LATER Effect

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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