Q. Who Cares About The Future?

A. Not us humans, that’s for sure..

Any objective view of the state of our economy, politics, technology and even our own day-to-day behavior provides loads of evidence that we are living for the moment. We don’t save enough for our retirement, our planet continues to warm and our economy gets more unequal because we don’t make the required, hard, thoughtful and expensive decisions today. Finance, psychology and philosophy all have something to say about this and suggest cures.

Finance

Finance offers some black and white guidance. For any decision affecting the future, you should project its costs and benefits now and into the future. Simply figure out how much you would need to invest today such that it will grow to equal those future values. This is known as exponential discounting. For example, a hypothetical 30-year-old named Isabella should be willing to give up $100 per month in current spending so long as this will turn into an extra $400 per month when she retires, assuming it grows at a rate of 3% above inflation.

Philosophy

However, a purely financial calculation hides some deep philosophical questions. For example, will the money that present-day Isabella is saving actually go to the same person or is future-Isabella a fundamentally different person? Like the ship of Theseus, over time, our personalities change, our values change, even our cells turn over. If future-Isabella is effectively a different person, then what is present-Isabella’s moral responsibility to take care of this stranger?

A related ethical problem relates to time scales. It’s clear that our current climate predicament is the result of more than a century of humans ignoring the long-term costs of present-day activities. This is especially true of costs that affect other people, including future generations (externalities). Even if prior generations had done the financial math, it would likely not have changed their behaviors. $1 billion worth of damage in 50 years is worth only about $34 million today (using a 7% interest rate). If present-humans believe they have an ethical obligation to future humans or to the planet as a whole, they’d have to use a much lower—perhaps even negative—interest rate to justify expensive change today. One’s choice of discount rate can be a moral and political choice.

Psychology

While discounting the future is a financial as well as ethical process, it’s also a psychological one. A very long-standing finding in behavioral economics is that humans are present-biased. This means that most would require a much bigger benefit tomorrow versus today, and would not demand the same difference between a year from now and a year plus a day. This known as hyperbolic discounting and can give very different results than the exponential model finance-types prefer.

Many of us struggle with impulsivity and the desire for immediate gratification. Indeed, our economy is structured precisely to enhance and satisfy these very short-term and potentially self-destructive psychological traits. Pervasive advertising, social comparison on social media and materialism all conspire to make the future feel less relevant (until it becomes the present).

Insofar as present-Isabella considers future-Isabella worthy of consideration, she may simply lack empathy for her. A culture that values youth can make such empathy even harder to generate.

Extreme Discounting

My community college students are excellent examples of all these challenges. Recently I gave them a short survey in which I asked them to consider a scenario where they have a choice between $100 today or a guaranteed, larger amount in the future, which they supplied. The average student discounted one-month payments by 40% and one-year payments by 80%. These are much higher discounts than I was expecting, or that could be justified by exponential or hyperbolic discounting it looks more like a power law).

Are these students so extremely present-biased because they implicitly believe their future selves are completely different people and haven’t developed empathic skills to care about them? Or was it because many of them experience scarcity in their lives, which causes them to tunnel on the present. Or perhaps they would truly enjoy that $100 today as much as $500 in a year’s time (reflecting their 80% discount).  I worry that my students’ very high discount rates could mean that they’re under-investing in their futures, more likely to take on too much debt and even skip my class. 

My hope for my students, and for, all of us, is that we can be more mindful of the trade-offs we make daily between present and future. We can understand the limitations of classical finance theory, especially with respect to long-dated decisions and decisions with ethical dimensions. We can acknowledge and take steps to mitigate our impulsivity.  And we can take a moment to vividly imagine our future selves in a future world that we will both comfortable and proud to live in and pass on to future generations.