Andrew Leigh

Increasing financial literacy among young people is really important. That's why I was pleased to contribute to The Wealth Academy's latest edition of Teenfinca magazine.

The Economics of Today, Teenfinca

In an experiment on food choices, students were asked to choose between some free junk food or a free piece of fruit. Half chose junk food, and half chose fruit. They were then asked to come back a week later. Upon their return, they were asked whether they would like to switch their choice. Hardly anyone who’d chosen junk food switched to fruit, but two thirds of those who’d said fruit switched to junk food on the day. As the old joke goes: what’s the best day to start a diet? – Tomorrow.

One of the fundamental ideas of economics is the notion of discount rates, meaning that we value things less when they are further away in time. If you offer me $100 now or $100 in a year’s time, it’s reasonable that I’d prefer the money now. Even if I didn’t want to spend it, I could put it in the bank or buy some shares, and the money would be likely to be worth more tomorrow.

But in recent years, economists have noticed something odd about how people discount the future. The difference between today and tomorrow seems to be treated differently from any other one-day delay. For example, if I ask you to choose between $10 in ten days’ time or $11 in eleven days’ time, you’ll probably wait the extra day. But you’re more likely to opt for $10 today over $11 tomorrow. In both cases, the deal is the same – a day’s delay buys you another dollar. But the magic of ‘now’ is often too tempting to refuse.

The economics of ‘today’ shows up in all kinds of interesting ways. One experiment found that when asked to choose a movie to watch tonight, two-thirds wanted a low-brow movie like an action blockbuster. But if they were choosing a movie to watch in a week’s time, two-thirds wanted a high-brow movie, such as a French love story. Users of the movie download service Netflix frequently find themselves putting high-brow movies in their queue, then skipping over them for a bit of brain candy.

Firms, not surprisingly, are adept at exploiting the temptation of ‘today’. Grocery stores put lollies at the checkout. Credit cards have low or zero annual fees, but high interest rates for those who pay late. Mobile phone plans have low upfront costs, but rates rise rapidly for those who exceed their caps.

How can you fight back? In the case of dieting, simple rules of thumb can help you stay healthy. Start snacking with fruit, eat off a small plate, and don’t eat dinner in front of the television. If you’re in the throes of temptation, ask yourself ‘how will I feel tomorrow if I eat this?’.

Similarly, exercising well requires battling the urge to put off today’s jog until tomorrow. That’s why even the most avid fitness buffs tend to write down a program for the week, plan their exercise with a friend, and pick sports that you’ll enjoy (or at least, which cause less suffering!).

Being able to overcome the temptations of today turns out to be one of the most important life skills you can acquire. Whether it’s staying off cigarettes, sticking with school, or seeing a relationship through a rough patch, patience turns out to be a vital trait in the modern world.

One illustration of this comes from the famous ‘marshmallow experiment’, in which a child aged between 4 and 6 years sits at a table with a single marshmallow on it. The child is told that if they wait 10 minutes without eating the marshmallow, they will get another one at the end of that time. The younger the child, the more difficulty they have in overcoming their desire for ‘now’ in return for a reward in the future.

Interestingly, those children who succeed in not eating the marshmallow often have clever strategies to solve the problem. Because staring at the treat makes it harder, they create distraction games, such as singing, counting, covering their eyes or turning around. Like an adult looking to avoid the problem of overeating or underexercising, children who win at the marshmallow game often do so through ingenuity, not mere willpower.

Followed up decades later, the research team showed that children who were able to resist eating the marshmallow had better test scores and higher educational attainment. They were more organised and better able to handle stress. Children who delayed eating the marshmallow even turned out to have a lower body mass index – which is ironic, given that the researchers had given them two marshmallows rather than one!

Overcoming temptation probably has some genetic component, but it’s also likely that you can get better at it over time. Willpower, like a muscle, gets stronger when it’s used. Saving money, going to the gym, eating well, and not smoking are all habits that tend to go together.

So if you’re tempted to eat the marshmallow immediately, choose low-brow movies,  and skip the gym for a junk food binge, don’t think you’re unique. The temptations of today have a powerful hold on many of us. Yet because delayed gratification leads to better outcomes, it’s useful to think about how economics can be used not just to identify the problem, but also to make us better off in the future.