Polls / April 9, 2010

Which would you choose to get: EUR50 now or EUR55 in a year?

Given the choice of getting €50 now or €55 in a year, 60% of respondents to the latest eZonomics poll would go for the quick win. The rest would wait a year for the extra money.

The old saying may be wrong – a bird in the hand may not be worth two in the bush
Getting a surprise windfall is win-win – no matter if it’s €50 now or €55 in a year. But the delayed option – €55 in a year – is arguably a better deal as it represents a 10% guaranteed rise in value a year. So why did more poll respondents prefer an immediate reward with a lower financial value? It is likely to be related to what is technically called hyperbolic discounting, the theory that consequences of choices are considered less the more distantly they fall in the future. In short, we tend to prefer to be rewarded now rather than being rewarded in the future. Hyperbolic discounting has wider implications as it is one of the reasons people can be tempted to borrow more than they can repay or to spend now to the detriment of longer term savings goals.

A big financial future can be built through small, regular savings
The eZonomics poll offered a hike of just €5 for delaying the reward but experiments offering larger windfalls have shown similar results.
Personal finance website Frugal Dad used the hyperbolic discounting argument to show that “sacrificing a little bit of fun or extravagance today” and investing it for the future can pay off. Forgoing a daily €2 coffee adds up to €10 savings each working week and about €520 a year. Investing that money at 5% per year would see it build to €7,400 in a decade and €18,600 in 20 years.
Over a long time, small savings can build in to significant sums.

Think first, act later
The lesson of hyperbolic discounting is to remind savers to think about the future in the same way as they think about the present. Before making a snap investment or spending decision, take a few moments to think about the consequences it could have down the line.
Another tip is to imagine your life 30 years from now. The eZonomics story Forward thinking explains that an experiment suggests using photo aging software to literally "see your future self" might make it easier to save for the future.

InvestingSavingIrrationalMistakes

eZonomics team
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