Present Bias

Humans have a strong tendency to focus disproportionately on the present and near-term future. The value we place on an object or activity falls off very rapidly as we look into the future, and then it tails off more slowly thereafter. Present Bias could be characterized by the lack of self-control needed to follow one’s long-term goals. It also explains why many of us engage in such behaviors such as excessive eating, lack of exercise, and excessive spending that feel good in the present but can have unfortunate consequences in the future.

Retirement is way in the future, for most employees, and many find it difficult to imagine what they will be doing in their retirement years will measure up to the pleasure they are enjoying in the present. Present Bias therefore leads people to procrastinate – “I plan to start increasing my savings for retirement tomorrow.”

In many cases, tomorrow often turns into never.

Auto Increase can help to avoid Present Bias by asking the employee to commit to increase their savings rate at some time in the future.

 


Source: Benartzi, S. (2012). Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans. Portfolio/Penguin Group Publishers.


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