Present Bias: Lessons Learned and To Be Learned

Present bias is an old idea. The notion that people are susceptible to the over-pursuit of immediate gratification dates (at least) to the ancient Greeks. In academic research, psychologists working with animals in the 1960s and 1970s proposed “hyperbolic discounting”—a functional form of discounting that generates present bias—as a natural way to represent how animals respond to time delays, and later research in psychology extended this idea to humans. Also in the 1960s, economists investigating general implications of time-inconsistent preferences used as an example the now-popular β, δ functional form—which also generates present bias. But present bias really took hold in economics following David Laibson’s dissertation (Laibson 1994). The literature has blossomed in the past 20 years. Research has led to a much better theoretical understanding of present bias, when and how to apply it, and which ancillary assumptions are appropriate in different contexts. Empirical analyses have demonstrated how present bias can improve our understanding of behavior in various economic field contexts. While the model is clearly not “correct”—no model is— for many contexts it is proving a useful, tractable, and (importantly) disciplined improvement in economic analysis. Nonetheless, there is still much to learn.