Financial Decision Making and Present Bias

Present biased preferences induce time-inconsistent behavior in intertemporal decision problems and are one of the cornerstones of behavioral economics (DellaVigna, 2009). One of the most important domains of intertemporal decision making is choosing the structure and financing of consumption patterns, including whether, how, and how much to save and invest money. From a theoretical perspective, individuals with present biased preferences should behave systematically different in these areas than individuals with “standard” intertemporal preferences that feature exponential discounting. This raises the question about the prevalence and severity of time-inconsistent behavior in this area: Are present-biased preferences a determinant of suboptimal financial decision making? Can we use methods from experimental economics to identify individuals particularly prone to making financial mistakes? If so, can we use these measures to customize individual programs aiming at improving financial decision making of households and thus improve their cost-efficiency as well as effectiveness? In this project, we want to shed light on the prevalence of present-biased behavior in real world financial decisions. By collaborating with a fin-tech start-up based in Berlin, we are able to access detailed financial account data from approximately 10,000 clients. Using this transaction-level bank account data, we elicit whether people show signs of present bias. The crucial characteristic of this data set is that it is transaction based. This allows us to explicitly identify those individuals whose consumption, financing, and savings behavior can be classified as present biased.