Blogs | June 6, 2018

Young – and prepared to wait for financial gain?

An ING study suggests that older people can be more impatient for profit. Behavioural scientist Jess Exton explains.

Delaying something good in favour of planning for the future is no small challenge for most of us. However, a study from ING Belgium finds that older people are more likely to fall prey to this temptation, and its resulting effect on personal finances.

The tendencies to value immediate gains over future benefits, known as temporal discounting, and to view our future self differently from how we see ourselves right now typically encourage us to ignore future possibilities.  

Testing now and then
In the ING Belgium survey, people were asked if they would prefer €10,000 now or €15,000 in five years. Those who chose to wait would receive €5000 more than those who got the money immediately – about 8.5% more a year.

Fifty-four percent of people chose to receive the money immediately, foregoing the financial benefits of waiting.

These people were more likely to be older: 58% of 55-64 year-olds and 69% of 65+ year-olds in the survey said they’d prefer €10,000 now.

The choices we make are typically affected by many factors, including how healthy, wealthy and happy we feel.

That said, it can often make sense to think of our future selves, who will probably want a comfortable retirement, instead of always prioritising the present.

Don’t have enough?
Our mental states and environment affect our actions; living with too little reduces our mental bandwidth and distorts our decision-making. It’s easy to obsess about something we lack, whether it’s time to finish a report, money to pay the rent, or friends in a new city.

So it’s not surprising that 40% of the people in the Belgian study who chose to take their money immediately said they “really needed the money now”.

Most people who chose to receive the money now were going to spend it. But their reasons for doing that might change.

When something is less readily available we tend to value it more highly .

We see this in the further 25% who chose to take their money “now” and who said they were acting on their preference for spending it now – which suggests that they believed this would be most beneficial for them.

What’s money for, though?
But we don’t all think about finances in the same way. How we view money is linked to many factors, including how much we have, our gender, where we come from and how well we understand money management. 

In the Belgian study, most people who chose to receive the money now were going to spend it. But their reasons for doing that might change over their lifetime. Younger respondents were likelier to say they really needed the money now; older people said they simply preferred to take it.

Can you calculate the gain?
People on average now live longer. Meanwhile, studies highlight that savings are both closely correlated with life expectancy and largely affected by the risk of outliving the expected lifespan.

Furthermore, older populations generally believe themselves to be more well informed than they are, despite average financial literacy levels being relatively low .

There might be a clue to why we see this in the nearly one in five (19%) people in the ING Belgium study who chose to have the money immediately. This group said that, if they invested the money they received now, they would end up with more than €15,000 in five years’ time.

In reality, this would be very hard to achieve. The gain from waiting would most likely be quite a lot larger than conventional returns from investing the smaller sum.

Personal decisions
If people weigh up their options mathematically, calculating the benefits of gaining a smaller reward now against the real pain of waiting for a larger benefit, they can identify the greatest long-term outcome for them.

But we are humans, facing the age-old challenge of working out what we’ll need in future, despite living in the present.

Imagining our future is challenging: we typically underestimate how much we’ll change as individuals over time. Focusing on future benefits and picturing how we would personally feel in a given situation can really help us make better decisions longer term. 

SavingRetirementPresent bias

Jessica Exton
Jessica Exton

Behavioural scientist at ING
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