Episode 2
Why You Can't Resist That Dessert: Understanding Present Bias
Present bias, the tendency to favor immediate rewards over future benefits, takes center stage in this engaging exploration. The episode delves into how this bias influences our everyday decisions, from indulging in desserts to making significant life choices like job searching and retirement saving. We highlight the complexities of present bias, drawing distinctions between sophisticated and naive individuals, and how awareness of this bias can impact our behaviors. The conversation underscores the importance of understanding the psychological mechanisms at play, as even minor present bias can lead to substantial long-term consequences. Ultimately, the episode encourages listeners to approach their decision-making processes with compassion and awareness, paving the way for more informed choices that benefit both their present and future selves.
Paper Referenced:
O'Donoghue, Ted, and Matthew Rabin. 2015. "Present Bias: Lessons Learned and to Be Learned."American Economic Review, 105 (5): 273–79.
Link - https://www.aeaweb.org/articles?id=10.1257/aer.p20151085
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Transcript
Hi, all.
Parv:Welcome to this audio project where we decode the science of human behavior with a twist.
Parv:I'm Parv, and this podcast brings to you AI generated conversations that simplify complex hidden patterns that shape our decisions, emotions, and actions.
Parv:A while ago, I started using NotebookLM to help me translate academic research that talked about hidden internal patterns that make us us.
Parv:So let's dive in and uncover the unique algorithm that makes you you.
Speaker B:Welcome to the Deep Dive.
Speaker B:Today we're diving into the fascinating world of behavioral economics, specifically something you flagged for us called present bias.
Speaker B:You know that thing where the instant gratification siren song often drowns out the voice of our more sensible, future focused selves?
Speaker C:Exactly.
Speaker C:We've all been there.
Speaker B:We're going to break it all down for you.
Speaker B:What it is, why it matters, and maybe even uncover a few surprising insights along the way.
Speaker B:I'm ready to get into it, but I have a confession.
Speaker B:When I first saw present bias, I thought, ooh, that's just a fancy way of saying procrastination.
Speaker B:But it's way more than that, isn't it?
Speaker C:Oh, it goes much deeper than procrastination.
Speaker C:Present bias dives into the nitty gritty of how we value things in the present compared to how we value things in the future.
Speaker C:And it can get really interesting when we start to see how it plays out in our everyday decisions.
Speaker B:Okay, so let's unpack that.
Speaker B:First things first, for those of us who haven't spent much time thinking about how economists model human behavior, what exactly is present bias?
Speaker C:Imagine you've got a delicious dessert and you're trying to decide when to eat it.
Speaker C:There's this classic idea called exponential discounting, where you discount the future enjoyment.
Speaker C:A steady rate.
Speaker C:So maybe enjoying that dessert a week from now is only 90% as good as having it today.
Speaker C:And a month from now, it's 80% as good.
Speaker B:Right, I get that.
Speaker B:Delayed gratification and all that, but we're not always so good at it, are we?
Speaker C:Exactly.
Speaker C:And that's where present bias comes in.
Speaker C:Instead of that steady, predictable discounting, Present bias says we disproportionately favor the present.
Speaker C:That dessert, it's not just a little better today, it's significantly more tempting now compared to even a slight delay.
Speaker B:Okay, I'm starting to see why this is so interesting.
Speaker B:So how do economists actually model this?
Speaker B:It can't just be about when we choose to eat a dessert, right?
Speaker B:What about bigger decisions?
Speaker C:You're right.
Speaker C:They use something called the Elberi model.
Speaker C:Don't let those Greek letters scare you.
Speaker C:It's a really intuitive idea.
Speaker C:Ivilbury is like a measure of how much someone prioritizes the present moment.
Speaker C:A high bowl means they're really stuck in the now, while a low bowl means they're better at delaying gratification.
Speaker B:So someone with a high mock would eat the whole cake today, and someone with a low mock would spread it out over a week.
Speaker C:You got it.
Speaker C:And here's the kicker.
Speaker C:A baking middle of one actually means there's no present bias.
Speaker C:They discount the future at that steady rate.
Speaker C:They see a reward tomorrow as almost as good as a reward today.
Speaker C:But when baking middle drops below 1, present bias is officially in the house.
Speaker B:Okay, that makes sense.
Speaker B:But this brings up a question that's always puzzled me about behavioral economics.
Speaker B:How do economists deal with things like awareness and self control?
Speaker B:Some people seem totally oblivious to their present bias, while others are painfully aware of it.
Speaker C:You've hit on a really important point.
Speaker C:That Viking middle model I mentioned.
Speaker C:It can handle that too.
Speaker C:Economists talk about sophisticated individuals who are totally aware that their preferences are going to change in the future.
Speaker C:On the flip side, we have the naive folks who are totally in the dark about this.
Speaker C:And of course, most of us fall somewhere in between.
Speaker C:Partially naive.
Speaker B:Wow.
Speaker B:I can't believe there's actually a way to model that.
Speaker B:So you're telling me economists can model someone who knows they're going to want to eat the entire cake later, but still can't resist that extra slice?
Speaker B:Right now?
Speaker C:It might sound crazy, but that's exactly what they're doing.
Speaker C:And surprisingly, the research actually suggests it's a pretty accurate reflection of how we behave.
Speaker B:That's both impressive and a little terrifying.
Speaker B:But earlier you said this isn't just about money.
Speaker B:How does prison bias play out when we're talking about, say, searching for a new job or saving for retirement?
Speaker B:Decisions that have long term consequences?
Speaker C:That's where it gets even more interesting.
Speaker C:See, present bias isn't really about delaying money.
Speaker C:It's about delaying utility, which is essentially just a fancy way of saying satisfaction or happiness.
Speaker B:So we're not just weighing dollars and cents.
Speaker B:We're thinking about the immediate good feelings versus the potential future benefits, which, let's be honest, often feel way less tangible.
Speaker C:You've got it.
Speaker C:And this can lead to some pretty counterintuitive behaviors.
Speaker C:The research actually shows that present bias can make people choose to get paid less upfront in exchange for getting more money later, even if it makes zero financial sense.
Speaker B:Wait, really?
Speaker B:Who would choose to have less Money.
Speaker B:Now that doesn't make any sense.
Speaker C:I know it seems counterintuitive, but think about it.
Speaker C:Delaying income, especially if you're already living paycheck to paycheck, can act as a pre commitment tool.
Speaker C:It prevents you from overspending today.
Speaker C:It's like building a wall to protect your future self from those impulsive present bias urges.
Speaker B:Wow, that is fascinating.
Speaker B:So it's not just about instant gratification.
Speaker B:It's about managing our future selves, even if it's not always a conscious effort.
Speaker B:We're more complicated than I thought.
Speaker C:We are complex creatures.
Speaker C:It's a constant tug of war between our impulsive present self and our more rational, future oriented self.
Speaker B:Okay, this is a lot to take in.
Speaker B:Definitely more going on here than simply procrastinating on a to do list.
Speaker B:We're talking about the psychology of decision making, but we've only scratched the surface, haven't we?
Speaker C:Oh, barely.
Speaker C:There are so many layers to this.
Speaker C:For example, we haven't even gotten to how even the tiniest bit of present bias can snowball into huge consequences down the line.
Speaker C:Or the myth that being naive about our future selves always means we'll make irrational decisions.
Speaker B:Don't worry, listeners.
Speaker B:We're not letting you off the hook just yet.
Speaker B:We'll be back with more on present bias after a quick word from our sponsors.
Speaker B:So before the break, we were talking about how even small amounts of present bias can have a huge impact down the line.
Speaker B:And honestly, that's what I'm still stuck on.
Speaker B:It's like a tiny crack in a dam.
Speaker B:Seems insignificant until it isn't.
Speaker C:That's a great analogy, and you're right to be hung up on that point.
Speaker C:The researchers really hammered home that even what we might think of as a tiny bit of present bias can lead to huge differences in how we value things in the short term versus the long term.
Speaker B:So give us an example, because honestly, I'm having trouble wrapping my head around how a 1% difference here or there could have such a massive impact.
Speaker C:Okay, picture this.
Speaker C:The researchers introduce us to Johnny.
Speaker C:Johnny has just a tiny bit of present bias.
Speaker C:He values his utility today only 1% more than he'll value it tomorrow.
Speaker C:Seems small, right?
Speaker B:Right.
Speaker B:I mean, 1%?
Speaker B:I wouldn't even notice that difference in my daily life.
Speaker B:Would you?
Speaker C:Probably not.
Speaker C:But here's the catch.
Speaker C:If Johnny were an exponential discounter, that 1% difference would mean his yearly discount factor is a measly 0.026.
Speaker B:Hold on.026.
Speaker B:Does that mean what I think it means?
Speaker B:Is he basically saying anything that happens a year from now is worthless?
Speaker B:Because that doesn't sound like anyone I know.
Speaker C:That's exactly what it means.
Speaker C:Johnny would be saying future me can fend for himself, and that's just not how people actually operate.
Speaker C:We do care about our future selves, even if it's not quite as much as we care about our present selves.
Speaker C:That's why that seemingly insignificant amount of present bias is such a big deal.
Speaker C:It throws a wrench into those traditional economic models that rely on exponential discounting.
Speaker B:So present bias is all about that immediate pull, that short term discounting, while exponential discounting is how we think we should be valuing the future consistently and rationally.
Speaker B:At least that's what it sounds like to me.
Speaker C:You nailed it.
Speaker C:And this leads us perfectly to another critical point.
Speaker C:The researchers highlighted the role of naivete in present bias.
Speaker B:Right, we touched on that earlier.
Speaker B:And to be honest, I'm guilty of thinking those who are naive about their present bias are just being, well, irrational.
Speaker B:But you're saying it's not that simple.
Speaker C:There's so much more to it.
Speaker C:First, we need to remember that naivete in this context isn't just some random thing.
Speaker C:It's a real phenomenon.
Speaker C:One that behavioral economists can model study.
Speaker B:That's fascinating.
Speaker B:So we're not writing people off as irrational.
Speaker B:We're trying to understand the different ways our brains process decisions that have consequences spread out over time.
Speaker C:Exactly.
Speaker C:And once we start looking at naivete through that lens, it becomes much more relatable.
Speaker C:It's less about crazy behavior and more about being human.
Speaker B:Okay, I'm ready for an example.
Speaker B:Because right now it's hard for me to picture someone being completely oblivious to their own present bias.
Speaker C:Alright, how many times have you put off starting a diet or a new workout routine, even though you know it's good for you?
Speaker B:Oh, all the time.
Speaker B:I'm the queen of all start tomorrow when it comes to healthy habits.
Speaker C:And that is classic naivete in action.
Speaker C:We tell ourselves we'll start tomorrow, conveniently forgetting that tomorrow me is going to be just as susceptible to that same present bias.
Speaker B:It's like a cruel joke.
Speaker B:We set ourselves up for failure before we even begin.
Speaker B:That's not really irrational, is it?
Speaker B:It's just human.
Speaker C:Precisely.
Speaker C:And it's precisely why incorporating naivete into models of present bias is so important.
Speaker C:It helps us understand and maybe even predict these very relatable behaviors that might otherwise have us scratching our heads.
Speaker B:Okay, so we've got sophisticated present bias, naive present Bias and everything in between.
Speaker B:How in the world do researchers study this?
Speaker B:How can you measure how much present bias someone has, let alone what flavor of present bias they have?
Speaker C:That's where things get really clever.
Speaker C:Remember those beta and delta parameters we talked about?
Speaker C:Researchers have figured out how to use people's actual choices to estimate those values.
Speaker B:Wait, you're saying you can look at someone's decisions and figure out their present bias?
Speaker B:Tell me more.
Speaker B:How does that even work?
Speaker C:It's all about finding patterns.
Speaker C:Specifically patterns and choices that involve trade offs between getting something right now, getting something in the near future, and getting something in the distant future.
Speaker B:The paper you shared highlights some really cool studies.
Speaker B:For example, one study focused on how people manage their credit card debt versus how much they're saving for retirement.
Speaker C:Interesting.
Speaker C:I can see how those two things are perfect for this.
Speaker C:Credit card debt feels urgent and immediate.
Speaker C:Those bills are always there.
Speaker C:While retirement feels like some hazy, far off concept.
Speaker C:Exactly.
Speaker C:Borrowing on your credit card to fuel spending today is heavily influenced by present bias.
Speaker C:Right.
Speaker C:You want that thing now, but how much you save for retirement is driven more by that long term discounting, your delta.
Speaker C:So by comparing these two, researchers can start to tease out the relative influences of beta and delta.
Speaker B:That's incredible.
Speaker B:It's like they found a way to measure something as intangible as our perception of time.
Speaker C:It's pretty amazing.
Speaker C:And they didn't stop there.
Speaker C:They also looked at how present bias affects job searching.
Speaker B:Job searching?
Speaker B:I'm not sure I see the connection.
Speaker B:Fill me in.
Speaker C:Think about it.
Speaker C:Putting in the effort to find a new job, polish your resume, go on interviews.
Speaker C:That all takes effort.
Speaker C:Now for a payoff that might be weeks or even months down the line.
Speaker B:True.
Speaker B:It's much easier to tell myself I'll apply for jobs tomorrow when there are so many other things I'd rather be doing today.
Speaker B:Like catching up on my favorite podcasts.
Speaker C:There you go.
Speaker C:Present bias in action.
Speaker C:This study compared how much effort people put into their job search with the minimum salary they were willing to accept their reservation wage.
Speaker B:So the effort is tied to present bias.
Speaker B:Am I willing to do the work now while the salary is more about how much they value their future income?
Speaker C:You've got it.
Speaker C:By looking at these two things together, the researchers could isolate the effects of present bias, even in something as complex as job hunting.
Speaker B:Okay, my mind is officially blown, but now I have to ask.
Speaker B:If we can identify and even measure present bias so well, can we also control it?
Speaker B:Is there a way to rewire our present biased brains to make better choices for our future selves.
Speaker C:Ah, the million dollar question.
Speaker C:And while there's no easy fix, simply understanding present bias is a huge step in the right direction.
Speaker C:But before we get ahead of ourselves, we need to remember that present bias isn't the only thing influencing our decisions.
Speaker B:That's a good point.
Speaker B:It's easy to get caught up in thinking everything is about present bias.
Speaker B:What are some of the other factors that influence our choices?
Speaker B:That's a good point.
Speaker B:It's easy to get caught up in thinking everything is about present bias.
Speaker B:What are some of the other factors that influence our choices?
Speaker C:Well, there's a classic idea, Habit formation, where our past behaviors have a sneaky way of influencing our present choices.
Speaker C:Like, if you're used to having that big bowl of ice cream every night, it's going to be harder to resist, even when you know it's not the healthiest choice.
Speaker C:Our past selves sometimes have a strong hold over us.
Speaker B:Okay, that definitely resonates.
Speaker B:Breaking those ingrained habits is tough even when we know better.
Speaker C:It really is.
Speaker C:And then there's projection bias, which is all about misjudging what our future selves will actually want or enjoy.
Speaker C:Ever bought a whole pizza because you were starving, only to regret it later when you can only manage a few slices?
Speaker B:Oh, tell me I'm not the only one.
Speaker B:That's me every time.
Speaker C:You're definitely not alone.
Speaker C:We overestimate how much we'll want something in the future, Especially when we're feeling a certain way right now.
Speaker C:It's like our present emotions cloud our judgment.
Speaker B:So it's not just that we discount the future.
Speaker B:It's that we completely misinterpret it based on how we're feeling in the present.
Speaker B:This is getting complicated.
Speaker C:It is.
Speaker C:And just when you thought it couldn't get any more complex, there's anticipatory utility and intertemporal news utility to throw into the mix.
Speaker B:Okay, those sound intense.
Speaker B:Break those down for me.
Speaker B:In plain English, please.
Speaker C:Imagine how happy you get just thinking about an upcoming vacation or a concert you're excited about.
Speaker C:That, my friend, is anticipatory utility.
Speaker C:The pure joy of anticipation.
Speaker B:Oh, 100%.
Speaker B:Sometimes the anticipation is even better than the actual event.
Speaker C:Exactly.
Speaker C:And here's where it gets interesting.
Speaker C:That anticipation can actually influence the choices we make today.
Speaker C:It's like our brains are trying to maximize happiness across the board now and later.
Speaker B:So it's not just about weighing the costs and benefits.
Speaker B:It's about factoring in those waves of emotions.
Speaker B:The excitement the anticipation that comes along with that.
Speaker B:Choices.
Speaker C:You're getting it.
Speaker C:And then there's intertemporal lose utility.
Speaker C:Imagine this.
Speaker C:You win a prize, but you are expecting something even better.
Speaker C:Even though you won, you might actually feel a bit disappointed.
Speaker B:Oh, that's so true.
Speaker B:It's like our brains are constantly creating these expectations, and then we experience these bursts of joy or disappointment depending on whether reality exceeds or falls short.
Speaker C:Exactly.
Speaker C:It's as if our brains are financial markets constantly reacting to the news of our experiences.
Speaker C:And all of this is happening beneath the surface, quietly shaping our decisions and actions in ways we might not even be aware of.
Speaker B:Okay, seriously, my mind is blown.
Speaker B:Present bias is just the tip of the iceberg when it comes to understanding how we make choices that have consequences stretched out over time.
Speaker C:You said it.
Speaker C:And it really highlights the danger in jumping to conclusions about our own behavior or the behavior of others.
Speaker C:There's so much more going on beneath the surface.
Speaker B:So much more.
Speaker B:Okay, so we've established that present bias is real, it's measurable, and it can be easily confused with these other quirks of how our brains process time and rewards.
Speaker B:But what about those commitment devices we hear about so often?
Speaker B:Are they really all about present bias?
Speaker C:They often are.
Speaker C:The desire for a little pre commitment is a classic sign of what economists call sophisticated present bias.
Speaker C:You know you're going to be tempted later, so you try to lock your future self into a better path Now.
Speaker B:It's like signing up for that pricey year long gym membership, even though a tiny part of me knows I'll be lucky to make it past the first three months.
Speaker C:That's a perfect example.
Speaker C:But here's where it gets tricky.
Speaker C:The researchers caution us against jumping to conclusions about commitment.
Speaker B:Really?
Speaker B:What do you mean?
Speaker B:Isn't a commitment device, well, a sign of someone trying to commit to something?
Speaker C:It seems obvious, right?
Speaker C:But there are other reasons why people make commitments.
Speaker C:We already talked about some of them.
Speaker C:Wanting to influence our future beliefs, like with anticipatory utility.
Speaker C:Or misjudging our future preferences, like with projection bias.
Speaker C:Sometimes it's not about overcoming present bias, but about managing these other forces at play.
Speaker B:It's like we think we're outsmarting our present bias, but we might actually be falling prey to a whole other set of biases.
Speaker C:Exactly.
Speaker C:And it gets even trickier.
Speaker C:Sometimes what looks like a commitment might not be driven by a desire for commitment at all.
Speaker B:Really?
Speaker B:That doesn't make any sense.
Speaker B:Give me an example.
Speaker B:I need to wrap my head around this.
Speaker C:Okay, picture this.
Speaker C:Someone who always buys those tiny single serving bags of chips even though they know buying in bulk would save them money.
Speaker C:Seems like a classic case of trying to limit future consumption.
Speaker C:Right?
Speaker C:A sign of someone grappling with their present bias.
Speaker B:Right.
Speaker B:Future me will thank me for not having that giant bag of chips tempting me.
Speaker B:I've totally been there.
Speaker C:But here's the twist.
Speaker C:That same behavior could simply be someone who repeatedly underestimates how much they'll actually eat later.
Speaker C:It's not about pre commitment.
Speaker C:It's about consistently misjudging their future behavior.
Speaker B:Wow, that's such a good point.
Speaker B:It's a commitment device in disguise.
Speaker B:But not really.
Speaker C:Exactly.
Speaker C:It highlights how difficult it can be to decipher the real motivations behind our choices, even when we think they're obvious.
Speaker C:But wait, there's one more layer to this commitment puzzle.
Speaker B:Of course there is.
Speaker B:This wouldn't be a deep dive without a few more twists and turns.
Speaker B:What's the final twist?
Speaker C:Well, some of the things that look like the strongest commitments, the ones that seem undeniably driven by present bias, might actually have a sort of negative price attached to them.
Speaker B:A negative price?
Speaker B:Now you're just messing with me, right?
Speaker B:What does that even mean?
Speaker C:Think of it as paying a premium for that pre commitment.
Speaker C:One example the researchers gave is investing in something called illiquid assets.
Speaker B:Okay?
Speaker B:Like real estate or certain types of investments that are hard to quickly turn back into cash.
Speaker C:You got it.
Speaker C:That lack of liquidity can be a powerful commitment device, especially for someone struggling with present bias.
Speaker C:They're making it harder for their future self to access those funds for impulsive spending.
Speaker B:So I'm paying a price in the form of less flexibility and access to my own money to keep from making a bad decision later.
Speaker C:Exactly.
Speaker C:But here's the thing.
Speaker C:In the real world, illiquid assets often come with higher returns.
Speaker C:So even someone with naive present bias, meaning they don't even realize their preferences might shift, might still choose to invest in them simply because they know they need to keep their money tied up for a while.
Speaker C:It's not even about actively fighting present bias.
Speaker C:It's just a smart financial move.
Speaker B:Wow, this is making my head spin.
Speaker B:So it's not always about commitment.
Speaker B:It might just be about making sound financial choices.
Speaker C:Precisely.
Speaker C:It's another reminder to be cautious about how we interpret behavior.
Speaker C:Just because something looks like a commitment device doesn't mean it's fueled by a desire to overcome present bias.
Speaker C:There could be a whole host of other simpler explanations at play.
Speaker B:This has been incredibly Insightful.
Speaker B:We've covered so much ground.
Speaker B:We've explored how present bias works, how it's measured, and how it can be easily misinterpreted or confused with other biases.
Speaker B:Anything else we need to know before we wrap things up?
Speaker C:I think the main takeaway is while understanding present bias can be incredibly helpful, it's essential to remember that it's just one piece of the puzzle.
Speaker C:Like any scientific model, the present bias model has limitations.
Speaker C:It's not the be all and end all explanation for every decision we make.
Speaker B:Right.
Speaker B:We humans are far too complex for a single model to fully capture.
Speaker C:Exactly.
Speaker C:And that's why it's crucial to keep our minds open, to keep questioning, and to never stop refining our understanding of ourselves and how our minds work.
Speaker B:I love that.
Speaker B:So what are the most impactful things to keep in mind as we think about this idea of present bias?
Speaker C:I think the biggest takeaway is this we need to approach ourselves and others with more understanding and compassion.
Speaker C:It's not about labeling people as irrational or impulsive.
Speaker C:It's about recognizing that our brains are wired in a way that prioritizes the present moment, even when that comes at a cost to our future selves.
Speaker B:Easier said than done.
Speaker C:You're telling me.
Speaker C:But the good news is, with this knowledge of how present bias works, we can start to design interventions and even policies that can help us make better choices for ourselves and for society as a whole.
Speaker B:I love that.
Speaker B:So instead of beating ourselves up about our present bias, we can use this knowledge to create positive change.
Speaker B:That's something I can get behind.
Speaker C:Exactly.
Speaker C:It's all about empowering ourselves to make better choices.
Speaker B:This has been such an eye opening conversation.
Speaker B:Thank you for joining me on this deep dive.
Speaker B:And to all of you listening out there, thank you for being here.
Speaker B:We'll be back next time with another fascinating topic.
Speaker B:Until then, keep those brains engaged.
Speaker B:And remember, sometimes delaying that gratification leads to even sweeter rewards.
