The probability of flood somewhere in North America will always be bigger than flood in California, however the participants in a study relied on vivid memories, and the mental model of earthquakes a recurring feature in California, leading to floods would lead them to believe that floods somewhere in North America would be probabilistically smaller than California.
In our 24/7 information cycle we need to be careful with availability with usability.
We all endeavour for economic well-being and stability. But would you rather have 1 lac rupees immediately or five lacs in a year?
A recent study, The Globalizability of Temporal Discounting, published in Nature Human Behaviour, led by Professor Kai Ruggeri of Columbia University and 169 authors, investigated more than 13,000 participants across 61 countries and found that regardless of income group, people often prioritize instant reward. They tested temporal choice in multi-national heterogeneous populations. The decision-making behaviour was analysed based on the financial circumstances of the participants, their demographic situation, risk preference and economic prospects.
The study emphasized that people prefer immediate rewards over future outcomes. It is often assumed that people with lower incomes make drastic financial decisions while ignoring the long-term gains. This study showed that such behavioural anomaly is not limited to people with low income alone; instead, ‘temporal discounting’ also stands true for wealthy people – the greater the uncertainty (inflation, economic inequality), the greater the discounting.
Fig. 1 represents five inter-temporal choice anomalies across all study locations. Income, economic inequality, financial wealth, and inflation were all associated with the magnitude of inter-temporal choice patterns. Given an unfavourable economic environment, higher rates of discounting were observed.
Although differences in discounting can be seen between different countries, notable variability is present within countries. The choice anomalies are wider between individuals than between countries. Being poor is not the only reason associated with immediate gains. However, the unstable environment also affects such behavioural anomalies. In this line, the study provides evidence that anyone from any income background can demonstrate one or more decision anomalies.
It is understandable that people with lower income backgrounds may prefer immediate profits to improve their financial well-being. However, in an uncertain economic environment such as rising inflation – people from the high-income background also prefer instant amounts instead of a delayed higher amount. Importantly, these findings highlight that in the scenario of inflation, anyone can resort to the immediately available amount even if it is negligible.
The behaviour of rich and poor alike, across a wide range of economic and culturally diverse environments, contributes to economic inequality. Although it may not be fair to say that the findings are universal (or present in all individuals all the time), the study provides robustness in the patterns of choices across 61 countries. Results of the study can help narrow the inequality, for ex., interest rates on education, excessive savings for mortgages, and income tax, among others. Such examples of long-term financial plans and decision-making may be influenced by temporal discounting, resulting in an impact on persistent well-being.
Is it a grown-up version of the marshmallow test? (check out: Stanford Marshmallow Experiment)
Read one of our previous pieces on uncertain futures and choices.
Do you think research is limited to academia alone?
Don’t miss the conversation with Dr Jennifer Perusini on her novel research on PTSD diagnosis at Neurovation Labs and her journey from academia to starting her on own company.
Contribution by Fazli