MacroMonitor Market Trends Newsletter January 2020

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Gratification: Delay? No Delay?

People widely consider the renowned psychologist Daniel Kahneman to be a pioneer of behavioral economics and the study of behavioral finance. His research (in collaboration with his colleague Amos Tversky) exposed the ways in which individuals' actual behavior can depart from long-held economic theory that assumed people are generally rational and act in their best self-interest. This newsletter looks at one of two behavioral economic questions in the MacroMonitor. The first question measures delayed gratification; a second question measures loss aversion.

Question: Suppose you did some work for pay. When it came time to be, you were given the following choice: You can either get $100 today or, if you are willing to wait one year, you would be guaranteed to get more. For each (of these six) scenarios, which would you prefer? $100 today or: $110, or $125, or $150, or $175, or $200, or $225 in 12 months. Respondents are to make a choice for each pair.

In the past five waves, responses are consistent. Approximately one in four households say they would only accept $100 today, turning down a guarantee of more than twice as much if they waited 12 months. Although more households than not would delay payment for some guaranteed increase, more than half of households require at least a 50% gain ($150 or more in this example). Immediate payment might actually be the right choice for some households but, for many households, this preference for immediate gratification means leaving money on the table.

Figure 1: Trend: Minimum Amount Required to Accept Delayed Payment

Behavioral finance shows that decision-making is often influenced by irrational thinking, poor quality of information, and sometimes fear. Industry professionals have roles as both advisors and therapists. Financial providers need to take into account consumers' (sometimes irrational) predilections in designing products, processes, and defaults, to help consumers to make the most financially advantageous decisions in spite of themselves. Integrating behavioral-economic learning into everyday business should prove beneficial to financial consumers, intermediaries, and institutions.

This month's Segment Summary explores households at either end of the spectrum: households willing to delay gratification and households that want immediate gratification. Household characteristics, financial behavior, product ownership, and attitudes provide a better understanding of the distinctions between these two types of financial consumers.

The MacroMonitor provides fact-based information to identify, profile, and understand household populations better. For more information, please contact us.

Subscribers have access to this month's Segment Summary, Delayed versus Immediate Gratification Subscribers may request the underlying set of data for this Segment Summary. For more information, please contact CFD.