moneyFYI
Financial Freedom Is Merely Organized Common Sense
Is Procrastination Possible?
From experience, I would say most assuredly! Certainly! Procrastination exists but we do not fully understand it.
We know, with certainty, that “procrastinate” is not actionable. “Procrastinate Now!” is an oxymoron. That inconsistency should tip us off to look deeper.
People have an internal comparison system that does deep calculations on cost-benefit. Our decisions rely entirely on this. It protects us from paying more than the value we get back.
Somehow, procrastination must have a valuable payback, yet we all believe that it does not. Again a contradiction.
When faced with contradictions, it is wise to begin by examining the background. The things that are “true” beyond questioning.
In the case of procrastination, the problem lies with how we value future paybacks.
There is a simple way. In finance, it is called present value. PV calculations require that the future payback is worth the input plus the time value of money. If I give up $1 today, I must get back the dollar plus interest a year from now. My only decision is “What is my interest requirement?” (Discount rate.) At 4%, $1 today and $1.04 a year from now are the same thing.
Very rational.
Unfortunately, being people, rational is the choice after trying all other possibilities. In the first instance people want instant gratification, because it is easiest to compare cost/benefit. If they must wait, and they don’t want to, they discount the future value, but they don’t know how. How long would I be willing to wait to eat two premium chocolates if instead, I could take one chocolate now. Half an hour? A day?
Most people don’t use simple discounting, they use a different process. “Hyperbolic Discounting.” Exaggerated discounting.
Under hyperbolic discounting the future reward resulting from acting now has much less value than it would under simple discounting. Maybe $1 in the future is only worth 60 cents to me today.
Our rational discount rate idea misleads us because the one we intuitively use is much larger. The result is, the discounted future value is not big enough to make the pain of doing it now worth the trouble.
A good many of the hard questions in society relate to discounting errors. To avoid procrastination we must understand our discount rate and how we are fooled.
Discounting applies to more than future rewards. It applies to future costs too.
We accept future costs as being small if they are far away. I would never pay $10,000 cash for this furniture, but what if I don’t have to pay for 18 months. I would not be the campaign chair for the United Way if I started today, but starting in two years it’s easy to say yes. These are the “Distant Elephant” problem. Elephants, far away, look tiny. Elephants, close by, are very large. Be careful of future cost commitments. They are too easy to make.
Success balances future values with current costs or future costs with current value. Do successful people simply have a lower discount rate? For both advisers and advised, it is worth finding out what the approximate rate is for each person.
At a minimum notice that saving and discipline pay off tomorrow and procrastination pays off today. That alone will explain a lot of behavior.
(Aside: Does this affect continuing poverty? For truly poor people, the ones who need every penny just to survive, their discounted future value is almost certainly $0.00. Maybe even if the payback is tomorrow. Capital formation means giving up something in the present to have more in the future and there is an unchallenged assumption that everyone can afford the input. If circumstances improve for these people, how long does it take their intuitive discount rate to change?)
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Contact: don@moneyfyi.com | Follow Twitter @DonShaughnessy
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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