Retirement savings are down. This cognitive bias is likely to blame.

Imagine you’re a five-year-old child. You enter a room. Someone offers you a free piece of candy (don’t worry, your mom is in the next room). Before you snatch it from his desk, they tell you that you can have one now, but they have to run out on an errand and if you can just wait until they return, you can have two pieces of candy.

What to do? Take the piece of candy, or wait for them to come back?

Variations of this famous 1970 study have been conducted for generations. Researchers have long wanted to understand the cognitive and social consequences of delaying gratification.

Or, as they call it, your willingness to engage in present bias.

A matter of time

While the concept of instant gratification was discussed by Greek poets during the Axial Age, economists began researching time preferences in the 1930s. These theories eventually resulted in the notion of hyperbolic discounting—a time-inconsistent model of delaying gratification.

In general, when similar rewards are offered, humans will choose to receive them sooner. The longer the length of delayed gratification, the more we’re likely to discount its value. If you’re offered $100 right now or $150 in a week, you’ll likely weigh those $50 more heavily than if you were offered $150 in a year.

Initially a social and philosophical idea, then one modeled by economics, present bias eventually made its way into neuroeconomics. Our habit of delaying gratification is tied into self-control, as well as our penchant for procrastination.

Brain regions associated with emotional valence and rewards processing have been implicated in present bias. The promise of immediate rewards trigger those brain regions, whereas the promise of a reward in a year barely affects them. We can imagine enjoying the reward in a year’s time, but not with the same pull as receiving it today.

Present bias impacts our decision making in many domains. Gratification provided by alcohol and cigarettes today has to be weighed against potential negative future health consequences—a judgment many fail to take into consideration. This is why regular health screenings are considered so important: detecting an issue early can lead to less disruptive interventions than ignoring your health entirely. This is also why calls for proactive health measures are so frequently discussed in the media, even if many people choose to ignore them.

The same can be said of your wallet.

To retire or not to retire…

From a macroeconomic perspective, a “present-biased” society acquires wealth during middle age and loses it by the time retirement arrives. Instead of delaying the gratification of spending money, members of such a society spend in the moment, worrying about their savings account down the road (if at all). This tracks with the aforementioned health-care decisions in which one “seizes the day” without understanding the compounding damage being done to their body.

Such a mindset is impacting Americans today. Research conducted in 2022 found that Millennials and Gen Z workers aren’t saving nearly enough for retirement. Unfortunately, this doesn’t improve with older generations: half of women (and 47% of men) between the ages of 55-66 have no personal retirement savings. Another 2022 study found that only 17% of American adults place retirement savings as their top financial priority—with 60% of respondents believing they’ll be unable to retire at 65.

The number of Americans failing to save for retirement has increased over the past decade even though the importance of retirement funds is a pillar of modern financial psychology. As we’ve covered on this blog, $81.5 billion of Warren Buffet’s $84.5 billion fortune hit his bank account after his 65th birthday.

In 1999, he made the reason for financial success clear:

I started building this little snowball at the top of a very long hill. The trick to having a very long hill is either starting very young or living to be very old.

We don’t really have the choice to live to be very old, though proactivity always helps—both in terms of health and money. And that means starting when you can. It also means waiting for the second piece of candy.

Of course, market-leading APY rewards don’t hurt.