Research findings challenge traditional notions of financial decision-making
We've all heard about or seen the experiment where a child is presented with a cupcake and a choice. They could either eat the cupcake now or wait a while and receive two cupcakes instead. The children almost always go for the single cupcake because they don't seem to have the patience to wait for a larger reward.
This experiment has also been conducted on adults but instead of cupcakes, money was used. With adults, however, it seemed to be the case that those that struggle financially always went for the short-term reward, while those who are relatively wealthy go for the long-term, higher reward. The conclusion was then made that being financially constrained leads to short-sighted financial decisions. However, what if that conclusion isn't as sound as we thought before?
A guaranteed immediate payout reduces impatience
Anouk Festjens and her colleagues tested the common research setting of offering subjects the choice between $50 now or $70 later against a new alternative. Specifically, they added a smaller immediate payment up-front for both options ($50 now + $30 now vs $70 later + $30 now). This small addition completely changed the conventional outcome.
The assurance of payment significantly affects the way financially constrained individuals make decisions compared to the scenario of forcing a choice between all-now or all-later payoffs. In fact, after receiving the initial down payment, there is virtually no difference in patience among less and more wealthy individuals.
A novel insight
Their findings provide a vital addition to our understanding of how individuals make financial decisions in the real world and how financial constraint influences short-term/long-term decision making. Specifically, it challenges the assumption that financially limited individuals generally don't think long-term. Quite the contrary; they care just as much as people who are relatively wealthier - as long as they can make their ends meet.
The findings illustrate that financial decision-making is not a fixed mindset but a mechanism that can be affected depending on environmental factors. These findings provide a solid basis for further research in this field.
|The research team behind this article consists of SBE researchers Kimberley van der Heijden, Anouk Festjens and Caroline Goukens as well as Tom Meyvis from the Leonard N. Stern School of Business. If you wish to read the full article, you can do so here.|
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