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The Present Bias of Banking

Present Bias refers to the innate human nature to value the short term over the long term. The behaviour is acutely evident in addictions where the value of say smoking a cigarette to overcome the immediate withdrawal effects is valued more than the long term health benefits of not smoking the cigarette.

Such bias towards the short term is evident in financial health as well as physical health. A simple example is where we have a loan to pay off but choose to buy the $3 coffee everyday as a treat rather making a $0.30 coffee at work. The maths is obvious: $3 every day is $15 a week or $60 a month which could make a dent in $1000 debt quite quickly. However the natural psyche is to value the short term pleasure of having the coffee now and simply avoid thinking about the long term pain of cranking up the debt. The problem of course is that maths doesn't help when it comes to human behaviour. People don't need logic to change behaviour they need stimulus and conditioning. David Laibson, Professor of economics at of Harvard University suggests that the present-bias problem as one of the driving forces of excessive borrowing.

Theresa Kulcher described the challenge in her research into why people don't pay off their credit cards even when they have enough cash, concluding by saying that "Further innovation should therefore focus on new and creative ways to inform and persuade consumers of their short-term bias and help them combat it"

Research conducted by at the Maastricht University adds that the present bias becomes more acute as the pendulum swings from high to low income, noting that in a study conducted in Turkey 29.4% of low-income individuals exhibit present-bias whereas this is down to 6.4% for high-income individuals.

Gamification has lots to offer financial institutions, savers and lenders in the challenge to overcome present bias. By rewarding customers in the present for taking actions that have a more long term reward we attempt to close the gap in time between action and outcome and neutralise the effect of the other things customers could do in the present. This can be done very simply by providing points and awards for making payments on time and in full. As well as leveraging individual reward and our need for instant gratification we can also harness some of our more primal needs for connection and belongingness as described by Maslow.

As with many innovations, it is unlikely to provide a silver bullet to the financial challenges at play. However, when added to a brand mix around financial inclusion and responsibility it does have more to offer than simply presenting people with lists of numbers that describe the problem and provide no real encouragement to actually do anything 

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Comments: (3)

John Fitzgerald
John Fitzgerald - AIB - Dublin 13 November, 2013, 08:18Be the first to give this comment the thumbs up 0 likes

Nice piece. Maybe ties into Nudge theory.

But on the high income people being more rational - isn't it just that high incomes have a greater capacity to absorb present bias? The impact of a daily $3 coffee is relative.

Colin Weir
Colin Weir - Moroku - Sydney 13 November, 2013, 08:55Be the first to give this comment the thumbs up 0 likes

I value the dialogue John

My sense is that the higher the income, the more strategic and long term the focus and thinking becomes. In Maslow's world this would be reflected in moving beyond fundamental physiological needs towards creating plans for greater security and self esteem. Thus present bias has less impact when referring to finance and therefore income.

Of course, if the high income earner has a physiological dependency, on for example nicotine, the Present Bias comes into full force and until they are adequately incented, their longer term focus becomes distorted in favour of the immediate need for fulfillment. Comfort eating might be another example .... but thats for another forum

A Finextra member
A Finextra member 14 November, 2013, 14:33Be the first to give this comment the thumbs up 0 likes

This is indeed an excellent post.  I agree, the public in general are pleasantly fulfilled when they receive short term gratification, making gamification greatest behaviour is the ability to reward users instantaneously.  I would also like to add, it is this real time feedback that makes the ‘players’ want to return for joy over and over again.