People often prefer immediate rewards over larger benefits in the future, a tendency known as present bias. Even when aware of long-term gains, they may prioritise short-term needs over future goals. This behavioural tendency can lead investors to postpone financial decisions, waiting for what they consider the ‘perfect’ time to invest.
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Understanding the effects of present bias
In the process, they risk missing time in the market-time that could have helped their money potentially grow steadily.
Understanding how present bias influences decisions may help investors reflect on their financial habits and take more balanced steps towards their goals.
What is present bias
Present bias is when an individual is more focused on present rewards rather than potential future outcomes. In investing, present bias means that investors would rather spend money today than invest it for returns that may come over a period.
For example, an investor might postpone setting aside Rs. 5,000 per month in a mutual fund because they prefer to spend it on present consumption. Over time, however, this delay may cause them to miss out on the potential growth of their investments. Since investing early allows compounding to work for longer periods, postponing it can have an important effect on long-term outcomes.
Why investors delay investing
Here are some reasons why some people may put off or delay investing:
Preference for immediate gratification
Immediate gratification can often feel more rewarding than fulfilling a long-term commitment. For instance, buying new gadgets or spending on new experiences may feel more fulfilling than sticking to a consistent investment plan that may show results over a period. Present bias magnifies this preference, making it harder to start investing.
Uncertainty about the future
The uncertainty of what may happen in the future may also discourage investors from planning ahead. Some may feel that they can always start investing later when they are more settled. However, this mindset can diminish the potential benefits of investing.
Fear of market fluctuations
For novice investors, market fluctuations may feel intimidating. Present bias can amplify this fear, as investors give more importance to the possibility of short-term losses than the potential for long-term growth. This may lead to them postponing investing until they feel the market is more suitable for participation.
Procrastination and lack of urgency
A lack of urgency can push investors to delay their investment decisions. Investing often requires time, attention and making crucial decisions. For many, this may mean that they take longer to make certain decisions. Hence, investment decisions may take a back seat in an investor’s mind. Present bias may strengthen this procrastination, leading investors to delay setting up an SIP or a lumpsum investment.
The cost of delaying investments
Delaying investments means missing out on the potential benefits of compounding. Compounding happens when the returns generated on an investment generate further returns over time. Even a few years’ delay may result in a potentially smaller corpus at the end of the investment horizon.
For example, if one investor starts contributing Rs. 5,000 per month at age 25 and another begins at age 30, and both invest until age 55, the earlier investor may end up with a larger corpus even though the monthly contribution is the same. The difference is because the one who began investing earlier gave their investments more time to potentially grow through compounding.
Ways to overcome present bias in investing
Although present bias is natural in an investor’s journey, individuals can take certain steps to manage it and begin investing sooner.
Starting small with an SIP: A Systematic Investment Plan allows investors to contribute small amounts regularly. Over time, investors may choose to increase their investment amount or step up their SIP as their income increases.
Linking investments to goals: When investors link investments to specific goals, they may strengthen their commitment. This is because when they tie their investments to meaningful outcomes, the motivation may increase, potentially reducing the effect of present bias.
Automating contributions: Automating contributions can help investors set aside money before they can spend it. For instance, setting up an automatic SIP can help investors remain consistent without having to take a fresh decision every month.
Focusing on the long term: While short-term market fluctuations might seem significant, long-term participation in mutual funds may help reduce their impact. Hence, having a long-term perspective may help investors reduce the effects of present bias.
Seeking professional guidance: Sometimes, consulting a financial advisor may help investors identify suitable options based on their preferences. With proper guidance, they may feel more confident about taking the first step.
Using tools to plan investments
Online tools such as compound interest calculators may help investors estimate how their money may potentially grow over time. By seeing the possible difference between starting now and delaying by a few years, investors can gain perspective on the effect of present bias. However, investors must note that the calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Applying the InQuBe philosophy
Bajaj Finserv AMC’s InQuBe philosophy recognises that investor behaviour can influence financial decisions. By combining careful analysis, structured information, and insights into market behaviour, InQuBe aims to provide a framework that supports more thoughtful and disciplined investing. In the context of present bias, this approach can help investors focus on long-term objectives, avoid postponing decisions, and maintain consistency in their investment journey.
Conclusion
Present bias often makes investors delay investing, as they focus more on immediate needs and less on long-term goals. However, recognising this tendency is the first step toward overcoming it. Starting small, linking investments to personal goals, and using tools like SIPs can help build consistent habits. While the future remains uncertain, early and disciplined investing may create a potentially more stable financial foundation. By becoming aware of behavioural patterns, investors can take more balanced decisions that align with their long-term objectives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.â¯
