By Daniel Read
Remember when your mum or dad would tell you not to have those sweets now because it would ruin your dinner? It turns out they had a pretty good idea of how to deal with intertemporal trade-offs.
Making decisions on what to do now that will affect our future are an everyday occurrence. Most of our decisions are intertemporal choices, ranging from the person on a diet agonising over a cream bun to the world’s scientists and leaders convening every year to agonise over the problem of climate change.
Should we buy an expensive TV now or put the money into our pension plan? Shall I have children now or build up my career and then have children? Should we have more cheap flights now or reduce the number of planes to lower climate temperatures in the future?
These are intertemporal trade-offs and despite economics teaching us we should weigh up the options, calculating the benefits between the two points in time and choosing the most beneficial, we don’t always do this in a way that is best for us, or for society.
Instead experiments have shown time and again that we have no patience and pick the tempting offer available to us now – ie eating the cream bun even though we are on a diet.
The experiments usually involve money. Do you want £10 now or £15 in six months? Most people choose the £10 even though that is an effective APR (Annual Percentage Rate) of more than 100 per cent – what bank is offering that?!
Even when the ante is upped to £100 now or £150 in six months, most people still choose the £100 now.
No wonder those climate change conferences rarely come up with any solutions that involve denying ourselves anything now. Rather, we want future societies to experience abstinence. As St Augustine said: “Lord, give me chastity and self-control – but not yet.”
New research by myself and colleagues Chris Olivola and David Hardity has found a well-placed zero can nudge people to be more patient and wait for the larger-later reward.
Going back to the parent trying to get their child not to have a snack before dinner, what they are really talking about is the opportunity cost of eating the sweets. An alternative way of saying this is "you will be giving up the enjoyment of your future dinner by having the snack now".
People typically do not think of the opportunity cost of missing out on the future benefit, but when this is explicitly pointed out to them our research shows people are more likely to hold on for the later-larger reward.
The power of a zero in developing patience
One experiment did this in the simplest possible way. We added zeroes to the usual money choice, which highlighted how each alternative option would pay out zero when the other option paid out.
It turns out that if you ask people to choose between £10 now and zero in six months or zero now and £15 in six months, they are more patient. That is, if you add two zeroes, each highlighting the opportunity cost of each option, you make people more likely to wait.
Why does this happen? We speculated that the main driver of this effect was in pointing out the opportunity cost of taking the immediate option. Perhaps pointing out the opportunity cost of the £10 now (that you won’t get £15 later) makes you more patient.
We investigated this by having groups of people choose between £10 now and £15 in six months under two additional zero conditions. In one, only the £0 opportunity cost associated with the £10 was made explicit; in the other only the £0 associated with the £15 was made explicit. The only effect was that people were more patient when the opportunity cost of the earlier £10 was made explicit.
Why is that? Well, if we look at our example of the kid reaching for a packet of sweets and the parent warning it will spoil their future dinner; the child already knows that if they wait for their dinner, this means they will not get the snack now (this is a zero outcome).
Their attention is completely focused on the current snack and how tempting it is. On the other hand, if you were to say “if you wait for your dinner you will get no snack now” they are unlikely to become more patient - the child is not even thinking about dinner.
The famous Austrian economist Eugen von Böhm-Bawerk observed how there is an asymmetry in how we view the present versus the future.
“The present always gets its rights," he said. "It forces itself upon us through our senses. To cry for food when hungry occurs even to a baby. But the future, we must anticipate and picture.”
We believe this is one reason for the effect of that zero – it makes what we will have to forego to get something now more salient.
Therefore moving people’s attention to that future consequence of current consumption does have an effect on their thinking, but moving their attention toward the fact that if they don’t take something now they won’t have something now has no effect.
We changed the context, giving them real-life scenarios, such as the government has to choose between two programmes to control pollution; save 100 lives now (but save no lives 25 years from now) or save 200 lives 25 years from now (but save no lives now). It revealed the same pattern.
We tried to find out if people understood the effect of the zero in the choices they made, we used a number of methods, but when we asked people to explain their choices they weren’t able to express the causal mechanism.
Just one per cent said "the reason why I chose the latter option was because I would have to give up the earlier option" and this percentage did not depend on which group they were in.
They didn’t even mention the zero, so this is a classic nudge. You move your gaze towards that later option, but there is no thought about it in a conscious way, you are not really aware it is affecting your choice.
This relates to a lot of research in behavioural science, and that is highlighted by Nick Chater in his book The Mind is Flat, in that we really are attending to very little of the information in the world, and are even not always aware of what information is coming in. Daniel Kahneman famously said in his groundbreaking book Thinking, Fast and Slow “what you see is all there is” - we don’t fill in any gaps.
Very often we make very momentous life decisions without realising it. For instance, imagine a 20 year-old decides to spend £500 on a new TV. If that money was invested at slightly over three per cent a year until they retired they would have £2,000 extra to retire on. So in buying that TV they are committing themselves to being significantly poorer when they retire, but it is doubtful that anyone is thinking about this when deciding about the TV.
But if the price ticket was framed as a choice between a TV now and £0 at age 65, or no TV now and £2,000 upon your retirement, it is likely that fewer TVs would be sold.
How pointing out the opportunity cost helps in decision making
This may seem like a radical solution, but it is very similar to calorie labelling on food. The label is there to remind you of the opportunity cost of consuming the yummy food, and I believe it would be useful to remind people of the opportunity cost of their purchases.
The “zero nudge” is one way of drawing attention to opportunity costs, but not the only way. Highlighting the opportunity cost even with something as small as a well-placed zero can make people more patient. It won’t stop global warming, but interventions like these are one piece of the larger puzzle.
Once again the evidence is clear – we should always listen to our parents.
Daniel Read, Professor of Behavioural Science, teaches Behavioural Sciences for the Manager on the Executive MBA and Executive MBA (London). He also lectures on Emotions in Business and Strategic Games on the Undergraduate programme.
Follow Daniel Read on Twitter @danielmabuse
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