Thursday, 31 July 2014

No time like the present

We are biased to getting our pleasures in life in the here and now. This is known as the ‘Present Bias’. Unlike the kids who could resist the marshmallow in Walter Mischels experiment, most of us are unwilling to put off getting what we want. Economists have noted this and describe the effect as Hyperbolic Discounting.

Essentially it means we are suckers for a discount now or a low ball entry price, even if the long term price is pretty high.

A 1998 study by Read and van Leeuwen investigated this by asking participants to make food choices for today and for next week. When it came to next week, 74% of participants decided on fruit. But when thinking about today, 70% chose chocolate. Putting off the treat was not on the menu.

Getting back to the economists, their modelling of this has influenced how many services and goods are presented to us. You can get a new iPhone for a really low price but must sign an 18 month contract with a minimum monthly package. Getting the iPhone now is very attractive, though the long term cost over 18 months can be quite expensive. Similarly you will hear advertisements for new cars which only cost €100 per week. Again, that sounds very attractive, though the long term part of the deal is often based on Hire Purchase or relatively high interest rates.

The take away here is that we fall for the ‘get it now, pay later’ deals. Like the participants in Read and van Leeuwen’s study, we are more concerned about today than next week. We are willing to spoil our present selves at the expense of our future selves.

If you are selling, then tap into this Present Bias or Hyperbolic Discounting, if you are buying, be wary of the discount offers and try to think a little more long term.

No comments:

Post a Comment