You will be able to explain present bias and how it affects the way people save and borrow.
Darren decided in January to start saving S$300 a month (an invented example). In February he pushed it to March because of Chinese New Year. In March the reason was the dentist, in April a friend's birthday trip, and in May a busy month at work. By August he still had not started, and every delay had felt reasonable at the time.
Nothing dramatic stopped him. Each month the choice was between spending now and saving for later, and now won. If he had started in January, he would have S$2,100 more after those seven months, before any interest.
Present bias is the tendency to give extra weight to what happens right now compared with anything later, much more than ordinary patience would explain. When both options are in the future, people are fairly patient. When one option is immediate, their patience drops.
Two questions show this. Many people prefer S$100 today over S$110 in a week. Yet most of those same people prefer S$110 in 53 weeks over S$100 in 52 weeks. Both questions offer the same trade: one week of waiting for S$10. The only thing that changes the answer is whether "now" is one of the options.
Others had described the tendency earlier. David Laibson, an economist, built some of the best-known models of present bias in the 1990s, and they show how it explains people who sincerely plan to save and then don't. The evidence is strongest for effort, food and spending on treats. Some careful lab studies found less present bias in simple choices between sums of money. The fair conclusion is that the pattern is real but varies by situation and by person.
Present bias explains repeated delay better than lack of knowledge does. When you plan for the near future, the plan looks easy because its cost is in the future and its benefit is clear. When the time arrives, the cost becomes today's cost, weighed against today's wants. Next month always looks easier because next month is never the month you are in.
The trap is that a patient self, looking ahead, sets the plan, and an impatient present self carries it out or doesn't. The two disagree, and the present self gets the final say.
The same pattern shows up when you mean to pay down debt, start investing, cancel a subscription, book a medical check-up or review your insurance. As a general rule, anything with a cost today and a benefit later is exposed to present bias.
Borrowing works the other way round. It moves the benefit into the present, where it counts extra, and the cost into the future, where it counts less, so the deal feels better than the numbers say. A S$3,000 holiday on a card instalment plan gives you the holiday now and spreads the cost over later months. This is part of why instalment plans, BNPL and car loans are easy to agree to. Lesson 4.1 showed the same effect in how BNPL splits a price.
Present bias does not make borrowing wrong. It means you tend to underestimate how much the future payments will hurt when they arrive.
The 52-week and 53-week question points to the method. People choose patiently when both options are in the future. So make your decisions about future saving or spending in advance, while the cost is not yet in the present. Then make those decisions hard to undo, and let them run, so your present self does not get to decide again each month. The patient self makes the decision, and the impatient self only has to live with it.
A standing instruction that moves money to savings on payday works this way, because by the time payday comes the decision is already made. A plan to save half of a future pay rise, made before the rise arrives, costs nothing today. Lessons 5.2 and 5.3 build on this idea of deciding in advance for the future.
In late August, Darren set up a S$300 transfer on payday, the one that appears in his log from Lesson 1.4. He then wrote in his log every month he had delayed and the reason he had given. None of the reasons were the same, but all of them were about something happening that week. His mistake was not that he wanted to enjoy February. It was that he left the saving decision to be made fresh each month by the self least likely to make it.
Think of one saving or spending plan you've postponed more than once, and recall the reason you gave yourself each time.
Write down one saving or spending plan you have put off more than once, and the reason you gave each time.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).