What is Present Bias?

Present bias is the tendency to overvalue immediate rewards at the expense of long-term goals.

Present Bias—Not Just an Investing Behavior

You may not recognize it, but present bias shows up all the time in our day-to-day lives. Not convinced? Have you ever delayed preparing for a meeting until the last moment or had plans to organize the garage turn into a movie marathon on the couch?

That’s present bias in action—making choices that feel good in the moment while discounting the future implications.

How Present Bias Impacts Investors

When it comes to financial decisions, present bias can have potentially disastrous effects. Things like overspending or anticipating a future windfall may create barriers to current saving and hamper long-term investment success.

Take retirement for example. When you’re young, single and just starting your career, putting money away for your golden years may pale in comparison to fun vacations or lavish purchases. But the “I’ll get to it later” approach can create a steeper hill to climb the longer you wait. Eventually, that lack of long-term planning and saving can have a significant impact on your readiness for retirement.

What can you do about it?

One of the best ways to make better financial decisions is to work with a financial advisor. A financial advisor will take the time to understand your individual needs and create an investment strategy that’s tailored to your specific goals, your individual situation your risk tolerance.

As you navigate the market, an advisor can also help you keep your emotions and biases in check and stay on track with regular portfolio reviews and adjustments.

Next Steps

Every day we are faced with decisions—some are easier to make than others. Learn more about behavioral biases and the impact they can have on investment portfolios.

Download Six Barriers to Investment Success: Uncovering Your Behavioral Biases

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