Many investors delay saving because short-term rewards feel more appealing than long-term gains. Understanding present bias can help you start investing sooner and build a stronger financial future
Many investors struggle with the urge to prioritise immediate rewards over long-term benefits, a tendency known as present bias. Even when aware of potential gains in the future, people often focus on satisfying short-term needs instead of taking steps that could help their money grow steadily over time. This behaviour may lead some investors to postpone financial decisions, waiting for the so-called ‘perfect’ moment to invest.
Understanding how present bias works can help investors reflect on their habits and take more balanced steps towards achieving their financial goals.
What is present bias?
Present bias occurs when a person gives more importance to rewards available now rather than potential outcomes in the future. In investing, this means that investors may prefer spending money immediately instead of setting it aside for returns that could come over a longer period.
Why do investors delay investing?
- Preference for immediate gratification
Immediate rewards can feel more satisfying than long-term commitments. Buying new gadgets or spending on experiences today may seem more rewarding than sticking to a consistent investment plan whose results are only visible over time. Present bias strengthens this preference, making it harder for investors to start saving or investing.
- Uncertainty about the future
Some investors hesitate to plan ahead because of uncertainty. They may think they can invest later when their situation is more stable. However, this mindset can reduce the potential benefits of investing early.
- Fear of market fluctuations
Novice investors often feel intimidated by market ups and downs. Present bias amplifies this fear, as the possibility of short-term losses may appear more important than the potential for long-term gains. This can lead to further delays in investing.
- Procrastination and lack of urgency
Investing requires time, attention, and decision-making. For many people, it can easily take a back seat. Present bias can strengthen procrastination, causing investors to postpone starting an SIP or making a lump-sum investment.
What is the cost of delaying investments?
Postponing investments may mean missing out on the benefits of compounding, where returns generate further returns over time. Even a delay of a few years can result in a smaller corpus at the end of the investment period.
For instance, if one investor begins contributing Rs. 5,000 per month at age 25 and another starts at age 30, both investing until age 55, the first investor is likely to accumulate a larger corpus. This is because investing earlier allows more time for potential growth through compounding.
How can investors overcome present bias?
Although present bias is a natural tendency, investors can take steps to start investing sooner and more consistently.
Starting small with an SIP: A Systematic Investment Plan allows investors to contribute small amounts regularly. Over time, they can increase the amount as their income grows.
Linking investments to goals: When investments are tied to personal goals, investors may feel more committed. The motivation to reach meaningful outcomes can reduce the impact of present bias.
Automating contributions: Setting up automatic investments ensures that money is set aside before it can be spent. This helps investors stay consistent without making a fresh decision each month.
Focusing on the long term: Market fluctuations may seem worrying, but a long-term perspective in mutual funds can reduce their impact.
Seeking professional guidance: Consulting a financial advisor can help investors choose options suited to their preferences, giving them confidence to take the first step.
How tools can help
Online tools, such as compound interest calculators, can help investors estimate how their money might grow over time. Seeing the difference between starting now and delaying by a few years can provide perspective on present bias. It is important to note, however, that calculators are aids, not predictions, and only provide indicative results.
Note: Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
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