Present bias and commitment devices: Tricking ourselves into making better long-term choices

Instant gratification

We all like instant gratification. Why wait, when I can have it now? Economists have always known that we prefer to consume now rather than later, and it's part of the reason investors require a return on their investment – not only is a return required to compensate for risk, but also to compensate the investor for not being able to spend now. This is a rational time preference. 

However, rational consumers don't disproportionately prefer consumption right now compared to future consumption. A rational consumer will save enough for retirement so that they can afford to live in their old age. They will also not borrow extensively on their credit cards to consume now and deal with the consequences later. 

In reality, however, many people have a lot of debt and don't save enough for retirement. Unfortunately, we are not rational as economists of old liked to think. We are willing to give up future consumption and comfort for getting what we want now. As a behavioural economist would say, we have a present bias. 

Present bias

Most of us, except for those with monk-like self discipline, will have a utility function that looks something like this:

Consumption now is not discounted, but anything that is not now is not as nice. The smaller your beta, the more you like to YOLO. A child (or a drunk person) might have a beta of 0 meaning they don't think about the future at all. 

Most of us do think about the future, and most of us think that in the future we will have more self control. That is why we always start a diet next week or start saving next month. This is something known as naive present bias – we optimise for happiness and comfort now with the erroneous belief that we will do the uncomfortable actions to achieve our long term goals tomorrow.  

The commitment device

This preference for instant gratification causes a host of problems for us including excessive debt, procrastination on our goals, sacrificing long term health for short term pleasure, to name a few. 

Just as our irrational behaviour can cause problems for us, understanding it and designing our lives to take our biases into account can help us optimise for the long term instead of the short term. 

This brings us to the concept of a commitment device. A commitment device is a strategic tool or action you set up in advance to lock in your future behaviour, ensuring you stick to your goals, even when your present self is feeling a bit less disciplined. 

An example of this is changing your social media password to something impossible to remember and giving the password to your friend with instructions to only give it back to you once you have completed an important task you have been putting off. You have limited your future options in a way that benefits your long term goals. 

Another example is the "Save More Tomorrow" programme that Richard Thaler introduced. The basic idea is that you choose a low level of savings now and commit to automatically increase this in future. Since future saving is less painful than saving now, this has led people to save significantly more than if they chose a savings level at the start of each year. 

In the movie Confessions of a Shopaholic, Becky freezes her credit card in a block of ice in the freezer to prevent her from shopping. This is a great example of a commitment device – instead of trying to control our impulses, by making the good long-term decision easy and the harmful (but pleasurable) decision difficult we can bypass the need for superhuman levels of self-control. 

Conclusion

We know we that like instant gratification. Perhaps we could work for years to develop monk-like self discipline. Alternatively, we can use commitment devices to design our lives to optimise for the long term and design a society to help people make better long-term choices by making the good choices easy and the harmful choices difficult.