Back to the Present Bias

Abstract

Much of the economic theory in the beginning of the 20th century assumes that people's tastes and preferences are invariant throughout time. However, recent studies show that this assumption cannot be supported by experiments. Humans are more inclined to present outcomes than future ones. Economists name this as present bias, which can formally be defined as the undervaluing of a larger, later reward and the preference for a smaller, sooner reward. Present bias has been considered a crucial element of economic/financial decision-making processes and it is shown to be related to various suboptimal outcomes. Here, the chapter per the authors summarizes several definitions of present bias, reviews the literature on present bias and behavioral based interventions. The chapter points out the importance and the relevance of some recent studies that stand out, as well as their implications for our day-to-day lives and how we can combat present bias.