The Present Bias Challenge of Banking
Caveman didn’t have a financial plan
Present Bias refers to the innate human nature to deal with what’s right in front of us, rather than worrying too much about the future. To the buddha’s dismay we’re actually wired at a deep biological level to be present, being really concerned with the short term over the long term. For millions of years our oprimary concern was with getting to the end of the day. Cave man had no 30 year plan. Medium and long term planning has begun to become a thing for many of us only very recently and indeed for much of the planet thre is still an overwhelming focus on the present. Research informs us that we have enormous amounts of difficulty relating to our future self, indeed having a third-person perspective of ourselves in the distant future. We overly discount future events, pain or pleasure. This is a very real challenge for banking especially those models such as investing and lending which are dependent on longer term thinking.
This difficulty in favouring the present moment over the future is acutely evident in addictions. When the smoker feels the surge of nicotine withdrawal arrive they deal with the immediate need, lighting up to quell the urge. They know that it’s gonna kill them, one cigarette at a time, but they also believe that death can be dealt with tomorrow, or the day after without having to go through the hell of giving up today. This is despite all of the graphical govenrment regulated advertising going on. It ain’t pretty but today there are more smokers than ever before.
We’re wired to move towards pleasure and away from pain and to do that in the moment. Even if tomorrow’s pain (death) and pleasure (life) is greater than today’s pain (withdrawal) and pleasure (acid throat burning … yes, its weird) we’ll choose based on what’s in our present moment. We overly discout future benefit.
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 tendency is to value the short term pleasure of having the coffee now and to avoid thinking about the long term pain of cranking up the debt. We are naturally optimistic, “She’ll be right”.
Maths doesn’t help when it comes to human behaviour. People don’t need logic to change behaviour and start saving money for the future and forgoing immediate gratification, 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.
If we are going to get people to behave in a way that selects the future over the present we need to provide some level of benefit in the present moment to adjust the balance. 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, just making banking fun is unlikely to provide a silver bullet to the financial challenges at play.As with many innovations, just making banking fun is unlikely to provide a silver bullet to the financial challenges at play.
However, when added to a broader strategy around financial inclusion, responsibility and customer success 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.