The Impacts of the Present Bias

The first step of getting over a problem is to acknowledge it.

When looking at any goal or achievement typically the mentality is – how can I get this with the least amount of effort? What is the fastest route to instant gratification? The present bias is a well-established phenomenon that innately we are all subjected to. But how can we get over this adolescent mentality and focus on the bigger picture.

Before we concentrate on overcoming this issue, we must understand why it occurs. Believe me, you will see this happening in every mundane corner of life, procrastination, diet, exercise and financially. Over 25% of people claim they do not have savings and the most common reason for not building savings for the future is that it can feel like a loss right now. This cognitive effect has detrimental impacts on retirement funds. People have not saved enough for retirement and subsequently compromise their standard of living upon retirement.

Another consequence of the present bias is rushing into investments. Crypto currency is easily accessible; gratifying the urge to invest in one simple click of a button – this often is not a thought-out plan! Subsequently the present bias will be at play when we see the markets drop. An overwhelming urge to vacate the bad situation and associated feelings. Sell and run (sadly locking in the loss!). The present bias is an emotionally driven, cognitive influence that can easily steer us into bad decisions.

So…you have read this far. Now the question should be resonating, how do I control this?

Its relatively simple, it all boils down to a plan. The reason why you are doing something must outweigh the urge for instant gratification. It could be putting the snack aside so as not to spoil your dinner, a smaller rental to build a deposit for the dream home or simply a little here and there to secure your financial independence. Whatever the motivation, it all boils down to the plan and remembering the true reason ‘why’.

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