Learning to give preference to long-term goals over more immediate ones is known as deferred gratification or patience and considered a virtue in many cultures. However, there is logic behind asking for rewards immediately, and those who live in poverty know this all too well.
The comedian Jerry Seinfeld, once joked “I never get enough sleep. I stay up late at night because I’m ‘night guy’. ‘Night guy’ wants to stay up late. ‘What about getting up after five hours of sleep?’ ‘Oh, that’s morning guy’s problem. That’s not my problem—I’m night guy! I stay up as late as I want.’
Such decisions are described by the theory of intertemporal choice, the idea that decisions have consequences that come at different points in time. People weigh the relative trade-offs of getting what they want in the immediate future with the trouble associated with waiting but potentially getting something better.
We all face these kinds of decisions in our day-to-day lives, from deciding to work now or later or save or spend money, to whether or not we should stay up late to enjoy the night or go to bed early to feel better the next day. In each of these cases, a decision maker needs to assess the utility (or value) of one outcome that is will occur sooner with another one that is more distant in the future.
A similar phenomenon, known as temporal discounting, relates to our tendency to want things now rather than later. In order to delay gratification, we must be convinced that the reward in the future is going to be sufficiently large to compensate us for not having it right now. Banks have understood this for a long time and have offered customers rewards— in the form of an interest rate— just to save money. Economists have also understood this and discuss it terms of the discount rate, or the amount of money that you would have to be offered after a time period to convince you to save. Generally speaking, the amount something is worth to you declines rapidly in the near future but more slowly into the far future. In other words, the difference between 365 days and 366 days is not psychologically significant whereas now and tomorrow matters much more.
Researchers have recently also started investigating the discounting of mixed outcomes— outcomes that have both a gain and a loss component. Soman (1998) studied monetary incentives that were offered for the completion of effort— for example, consumers that go to the effort of redeeming a mail-in rebate in exchange for cash or professors committing to teach an extra class for additional compensation. In these situations, there is a monetary gain but a loss of energy or time that comes from their effort. Soman’s results show that when the mixed outcome is in the future, it appears to be more attractive than when the same outcome is closer in time, suggesting different discounting profiles for effort and money.
How might this idea of a temporal discount relate to poverty?
People living in poverty, especially in developing countries, have been found, across a number of studies, to be more risk averse and more likely to discount future payoffs than wealthier individuals.
One study from 2008 measured “the discount rates of a sample of 262 farm households in the Ethiopian highlands, using a time preference experiment with real payoffs.” Households were offered four experiment sets, each of which had a number of choices between a specific amount of money to be received now and an alternative amount to be received in the future. Each choice was presented on a card, and the respondent’s preference was also recorded. Two versions of the test were conducted: in version 1, current rewards were fixed and future rewards changed, and in version 2, future rewards were fixed and current rewards changed in order to determine the time preferences of the subjects. In general, the median discount rate was very high and varied with wealth and risk aversion. When individuals have less money to work with they are less open to risk. Conversely, when they have more money to work with, they are more open to risk because they can more easily absorb the costs associated with risky outcomes. Their results also showed that when future returns were uncertain, risk-averse decision makers favored projects with shorter payback periods and were less willing to invest in projects with long-term benefits. Similarly, a study conducted in South India found that lower wealth predicts substantially higher discount rates.
Poverty, it seems, eliminates the ability to weather a financial shock and, therefore, both limits risk taking and increases the amount of money people seek to delay payment. This same logic also means that immediate gains are favored over future gains— even if the future gains are higher— because there is less certainty that the future gain will materialize.
What role does emotion play?
A number of recent studies have shown that the negative affect of emotional stress can lead to increases in discounting. Lerner, Li and Weber (2013) induced sadness by showing participants film clips that were independently verified to induce a melancholy mood. They then offered participants choices between smaller amounts of money available immediately or larger amounts available after a delay. Subjects who had viewed the sadness-inducing film clip were much more likely to choose the smaller, immediate payments than those in the control group, suggesting that they discounted future payments more strongly. Conversely, Ifcher and Zarghamee (2011) induced a positive emotional effect through film clips and found that it increased the ability of participants to delay gratification in a similar task.
Poverty is characterized not only by low income but also by a lack of access to services, exposure to violence and crime, and a host of other obstacles that have been shown to create stress for individuals and communities. Chemin, De Laat and Haushofer (2013) examined the impact of random negative income shocks to farmers in Kenya as a result of changes in rainfall and periods of drought, and found that farmers had higher levels of cortisol (“the stress hormone”) and also higher levels of self-reported stress during periods of drought when crops were likely to fail. This relationship did not hold for non-farmers and was more prominent among farmers who depended solely on agriculture for their income than among those who also had other, alternative ways to generate earnings. Another study measured cortisol levels in a sample of 354 Swedish blue-collar workers before and after some of these workers lost their jobs, and not surprisingly, cortisol levels were significantly higher in those workers who lost their jobs.
So, while Jerry Seinfeld is able to accurately sum up the effect of time on decision-making, the decision to opt for less sooner or more later is not always clear-cut. In some settings, future returns are uncertain and stress is high, encouraging people to take immediate rewards and smaller payouts rather than waiting to see what might happen.
Photograph of woman by Amanda Tipton via Flickr commons
Photograph of farmers sorting tomatoes by Stephan Bachenheimer via World Bank Photo Collection
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