One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following statements is true?

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Quizplus · Accepted Answer

CPresent bias refers to the tendency to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments. In this scenario, Liam and Jessie, who require $1200 in a year to forego $1000 today, are showing the highest present bias because they demand the highest future payment to give up an immediate reward. This indicates they heavily discount future payoffs compared to the present. On the other hand, Karishma, who only requires $1050 in a year to forego $1000 today, shows a lower level of present bias than Daniel, Liam, and Jessie, but still exhibits present bias by demanding more in the future than the present value. This suggests that while Karishma is less present biased than Liam and Jessie, she still values the present more than the future, just to a lesser extent than Daniel, making her the least present biased among the group.

One Reason for Making Inconsistent Choices Over Time Is That