A guaranteed immediate payout reduces impatience of financially constrained individuals

Significance

A wealth of existing findings show that financially constrained individuals are myopic decision-makers who are particularly concerned about the present. We propose that the use of existing intertemporal choice tasks may have skewed our understanding of the decision-making of financially constrained individuals. Specifically, we observe that—as long as an immediate payout is guaranteed—financially constrained individuals are no more myopic than their more affluent counterparts.

Abstract

A large stream of literature found that individuals who experience financial strain are particularly concerned about their present needs—that is, they are more likely to choose smaller immediate payoffs over larger future payoffs. In contrast, some recent findings suggest that financially constrained individuals may be more concerned about future needs instead (e.g., they are relatively more likely to invest in long-lived durables than in short-lived experiences). We propose that the use of traditional intertemporal choice tasks has made prior studies overly sensitive to the myopia-inducing effects of financial constraint. These tasks typically offer a choice between receiving a smaller payoff in the present versus a larger payoff in the future. Across three studies, we observe that, as long as some immediate payout is guaranteed, financially constrained individuals are as likely as nonconstrained individuals to accept a delay for a larger payoff. These findings qualify prior demonstrations of the myopic effects of financial constraint and suggest that the traditionally used choice paradigm might not accurately capture time preferences, particularly for financially constrained individuals. Furthermore, they provide possible interventions for those interested in reducing the myopia of financially constrained individuals who are facing all now versus all later decisions.

In 2020, the United States experienced its sharpest rise in poverty rates in more than 50 y (US Census Bureau, 2021) (1). In an attempt to lift individuals out of poverty, much research has been devoted to understanding the decision-making of financially constrained individuals. Within this context, it is typically found that people living in poverty discount the future more heavily compared to wealthier individuals: when presenting financially constrained individuals with a traditional intertemporal choice (e.g., $100 now versus $200 later), they go for the immediate, smaller reward (at the expense of the later, larger one), thus prioritizing the present over the future (2–8).

These findings are consistent with other behavioral research showing that financially constrained individuals are less likely to save and more likely to borrow at high interest rates (9–11). Overall, those at the bottom of the socioeconomic hierarchy seem to make myopic decisions that could perpetuate poverty. This tendency has notably been explained as resulting from financially constrained individuals’ “taxing” demands of daily life, which impair their cognitive abilities and lead to a tunneling of attention toward pressing needs [such as paying rent or basic utilities (12–14)].

Yet, despite the converging evidence associating financial constraint with myopia, prior research has also documented situations in which financially constrained individuals seem to care about long-term effects instead. For instance, making it salient to individuals that their financial resources are scarce has been found to trigger thoughts about the long-term consequences of their purchases (15) and increase efforts to stretch or enjoy their resources longer (16, 17). Furthermore, when needs are important but nonimminent, financially constrained individuals also make decisions in line with their long-term interest (18).

Financial constraint thus appears to bring about two—seemingly competing—motivations. Not only does it raise people’s concern to satisfy their pressing needs and immediate shortfalls (12–14) but it also triggers a concern to spend their scarce resources in a wise and future-oriented fashion (15–18). However, the economics and decision-making literatures that have documented the link between financial constraint and myopia do not seem to capture this second motivation and thus potentially portray an overly negative image of financially constrained decision-makers.

We argue that this oversight stems from the choice paradigm that is traditionally used to study intertemporal decision-making. To gauge time preferences, previous studies predominantly relied on a paradigm that urges a tradeoff between either a smaller payoff now or a larger payoff later, thus allowing individuals to experience consumption utility at only one point in time [all now versus all later (2–8)]. We argue that this stark tradeoff may reinforce individuals’ preoccupation with their immediate needs, which could encourage myopic financial decision-making.

An alternative approach would be to give individuals the choice between a small immediate payout versus a larger future payout plus an even smaller immediate payout. To illustrate, consider the following two choice scenarios. The first scenario involves a choice between an immediate $100 versus a future $200 (as in traditional intertemporal choice tasks), whereas the second scenario involves a choice between an immediate $150 versus a future $200 plus an immediate $50. Note that the second scenario is obtained by adding a guaranteed immediate $50 to both options in the first scenario, creating an option that yields utility at multiple points in time.

If the stark contrast between the immediate versus future reward in the traditional choice paradigm (i.e., the first scenario) indeed reinforces individuals’ preoccupation with their immediate needs, then adding a guaranteed immediate payout (i.e., the second scenario) should enable individuals to more dispassionately consider how to optimally invest their scarce resources. Moreover, this should apply particularly to financially constrained individuals—given their (sometimes necessary) preoccupation with their immediate needs (14).

This prediction shares a kinship with existing research in behavioral decision-making that observed that financially constrained individuals make less present-focused choices when their desperate situation is taken care off, either by reducing debt (6), by temporarily alleviating financial concerns (19, 20), or by inspiring trust that the community will provide a buffer against financial needs (21). Similarly, past research on self-control has proposed that—even without truly alleviating constraint—receiving a small reward may be enough to make deprived states more bearable and thus allow attention to drift from what one so strongly desires at the moment [e.g., a dieter eating a small snack to distract from hunger (22)].

In the studies presented below, we explicitly compare two choice paradigms that closely resemble the scenarios described above. We observe that when an immediate payout is guaranteed, financially constrained individuals are indeed no more myopic than their nonconstrained counterparts. These findings qualify prior demonstrations of the myopic effects of financial constraint and suggest that the traditionally used choice paradigm might not accurately capture time preferences, particularly for financially constrained individuals.

Note that our choice procedure is not unique in offering mixed payouts. The convex time budget (CTB) protocol (23–27) also enables participants to freely allocate an experimental budget over a sooner versus later date—with the later option including interest—across different exchange rates. Participants thus have the opportunity to reserve a small financial amount for now (and invest the remainder of the sum for later). Furthermore, most studies using the CTB method also rely on a split payment protocol for the participation fee. That is, one part of the fee is delivered at the sooner date and the other part at a future date. While this fee payment method is used to control for transaction costs (everyone will have two transactions even when only choosing payouts at a single date), it indirectly introduces a guaranteed payout on both sooner and later dates. Remarkably, a recent meta-analysis has shown that decision-makers are, on average, not present biased when their preferences are measured using this CTB approach (27). Yet, the CTB approach differs from the traditional choice paradigm in many ways (e.g., allowing choices across different exchange rates), so the absence of present bias could be attributed to a multitude of factors. Our experimental studies introduce only one change—that is, adding an immediate payout—to the traditional paradigm and investigate how this particular change impacts intertemporal decision-making—an impact that we expect to differ depending on individuals’ level of financial constraint.

Study 1. Measuring Financial Constraint

Experimental Design.

We recruited 185 participants (M_age = 40.17 y, 51.40% women) from Amazon’s Mechanical Turk who participated for a small fee. Participation was restricted to people who reported an income below $30,000. Also, participants who reported to not receive paychecks were not included in the analysis.

Participants were asked to engage in a financial decision-making task (consisting of three choice scenarios). Specifically, they were randomly assigned to one of two intertemporal choice task conditions: the classic intertemporal choice task (all now versus all later) or the task with guaranteed immediate payouts (all now versus some now and some later). In the classic task condition, participants were asked (three times) to choose between a smaller immediate amount and a larger delayed amount. The three scenarios differed in the magnitudes involved and the length of the delay. In the guaranteed immediate payout condition, participants received the same three choice scenarios, but a guaranteed immediate payout was added to each of the options. The amount of that payout varied across choice scenarios (Table 1). Participants indicated their relative preference for the smaller immediate option (A) versus the larger delayed option (B) on an 11-point scale (1: I very much prefer option A to option B, 11: I very much prefer option B to option A).

Table 1.

Choice task

	Classic intertemporal choice task	Task with guaranteed immediate payout
Choice 1: Immediate guaranteed payout = €5	Option A: Receive €20 now	Option A: Receive €25 now
	Option B: Receive €25 in 2 wk	Option B: Receive €5 now and €25 in 2 wk
Choice 2: Immediate guaranteed payout = €15	Option A: Receive €50 now	Option A: Receive €65 now
	Option B: Receive €70 in 6 mo	Option B: Receive €15 now and €70 in 6 mo
Choice 3: Immediate guaranteed payout = €20	Option A: Receive €80 now	Option A: Receive €100 now
	Option B: Receive €110 in 1 y	Option B: Receive €20 now and €110 in 1 y

Following this task, participants were asked to report the exact date on which they had received their most recent paycheck. We used the time that has passed since receiving their most recent paycheck as a proxy for feelings of financial constraint (12, 26).

Next, participants provided demographic information, including their age, gender, and income, followed by an attention check question (28). More in-depth information regarding the participant statistics can be found in Methods, and SI Appendix contains all the details of the materials that were presented to participants.

Results.

We conducted a repeated measures ANOVA on participants’ intertemporal preferences with paycheck recency and choice task as between-subjects factors and choice scenario as the within-subjects factor. There were no reliable main effects of choice task (F < 1) or paycheck recency [F(1, 181) = 1.04, P = 0.310, η² = 0.006], but we did observe the expected interaction of these two factors [F(1, 181) = 4.55, P = 0.034, η² = 0.025; Fig. 1].

Fig. 1.

Relation between paycheck recency and relative preference for the larger delayed option for the classic intertemporal choice task and intertemporal choice task with guaranteed immediate payout. Lower values on the paycheck recency axis indicate more recent paychecks and thus lower levels of constraint. (A) Relation between paycheck recency and relative preference for the larger delayed option over the smaller immediate option for the classic task (red solid line, 95% CIs shaded) and with the guaranteed-payout task (blue solid line, 95% CIs shaded). (B) Relation between paycheck recency (grouped in categories) and (mean) relative preference (of the respective category) for the larger delayed option over the smaller immediate option for the classic task (red bars) and guaranteed-payout task (blue bars).

When intertemporal preferences were elicited with the classic task (all now versus all later), participants for whom more time had passed since their last paycheck made more present-focused choices than those who had received a paycheck more recently [b = −0.15, SE = 0.06, t(181) = −2.44, P = 0.015]. Yet, when a guaranteed immediate payout was added to all options, the recency of the participants’ paycheck failed to affect their intertemporal preferences [b = 0.05, SE = 0.07, t(181) = 0.73, P = 0.466]. Furthermore, spotlight analyses at one SD above and below the mean showed that the addition of the immediate payout increased the patience of those for whom more time had passed since their last paycheck [b = 2.15, SE = 0.74, t(181) = 2.89, P = 0.004] but not for those who recently received a paycheck [b = −0.09, SE = 0.73, t(181) = − 0.1201, P = 0.905]. There was also a reliable main effect of the choice scenario [F(2, 362) = 17.792, P < 0.001, η² = 0.090; individuals were more patient in scenario 1 than in scenarios 2 and 3], but this did not interact with the other factors (all P values > 0.1).

Thus, whereas those under greater financial strain showed increased impatience in the classic intertemporal choice task, they did not make more present-focused choices when the intertemporal choices included a guaranteed payout. In the next study, we will manipulate feelings of financial constraint (rather than using the recency of the last paycheck as a proxy for it). This ensures that participants across conditions are similar in terms of liquidity constraints and arbitrage opportunities (in external capital markets).

Study 2. Manipulating Feelings of Financial Constraint

Experimental Design.

Participants (200; M_age = 25.58 y, 61.50% women) were unpaid volunteers recruited online. They were randomly assigned to one of four conditions in a 2 (priming of financial constraint: constrained versus nonconstrained, between subjects) × 2 (intertemporal choice task: classic versus guaranteed immediate payout, between subjects) × 3 (choice scenario, within subjects) mixed design. Following a previously established manipulation of financial constraint (29), we presented participants with a writing task that asked them to recall a situation in which they felt either financially worse off than their peers (constrained condition) or financially better off than their peers (nonconstrained condition). As in Study 1, participants were afterward randomly assigned to one of the two intertemporal choice task conditions: they either completed the classic choice task (all now versus all later) or the task with guaranteed immediate payouts (all now versus some now and some later). Additionally, we collected data on several demographic variables. SI Appendix contains all the details of the materials that were presented to participants.

Results.

We conducted a repeated measures ANOVA on participants’ intertemporal preferences with constraint priming and choice task as between-subjects factors and choice scenario as within-subjects factor. There was no reliable main effect of constraint [F(1, 196) = 1.11, P = 0.293, η² = 0.006], but there was a reliable main effect of choice task [F(1, 196) = 8.18, P = 0.005, η² = 0.040] that was qualified by the expected interaction with constraint [F(1, 196) = 11.60, P = 0.001, η² = 0.056; Fig. 2].

Fig. 2.

Participants’ relative preference for the larger delayed option over the smaller immediate option by financial constraint priming and type of intertemporal choice task (Study 2). Error bars represent SEMs.

In the classic intertemporal choice condition, financially constrained (versus nonconstrained) participants showed a greater preference for the smaller immediate payout, thus replicating the myopia-inducing effect of financial constraint [M_{Nonconstrained} = 6.97, SD = 3.16; M_Constrained = 5.09, SD = 2.93; F(1, 196) = 10.82, P = 0.001]. However, when a guaranteed immediate payout was added to both options, there was no reliable difference anymore between constrained and nonconstrained participants [M_Constrained = 7.72, SD = 3.00; M_{Nonconstrained} = 6.74, SD = 2.67; F(1, 196) = 2.56, P = 0.111]. Furthermore, adding a guaranteed immediate payout to both options shifted constrained participants’ preference toward the larger delayed option [F(1, 196) = 18.50, P < 0.001], while it did not affect the preference of nonconstrained participants (F < 1). Finally, the choice scenario had a reliable main effect [F(2, 392) = 27.405, P < 0.001, η² = 0.123; individuals were more patient in scenario 1 than in scenarios 2 and 3], but this did not interact with other factors (all P values > 0.2).

Thus, whereas participants primed with financial constraint showed greater impatience in the classic intertemporal choice task, they became as patient as those primed with more favorable financial thoughts when the larger delayed option also included a small immediate payout. This effect is thus independent of participants’ actual level of liquidity constraint and arbitrage possibilities—which are similar across both experimental groups.

Study 3. Field Setting

Experimental Design.

Participants (157; M_age = 45.36 y, 59.20% women) were unpaid volunteers recruited at a location that was either predominantly visited by financially constrained individuals (i.e., a city foodbank) or by financially nonconstrained individuals (i.e., a local golf club). Moreover, by administering the survey at a location that was tied to participants’ financial status, we ensured that their financial situation was highly accessible (30). The study employed a 2 (location/constraint: foodbank versus golf club, between subjects) × 2 (intertemporal choice task: classic versus guaranteed immediate payout, between subjects) × 3 (choice scenario, within subjects) mixed design.

A research assistant approached participants at each location and asked them if they were interested in participating in a study about financial decision-making. Upon agreement, they were handed a paper-and-pencil version of the survey. The survey started with the same decision-making task as in the first two studies (either the classic or the guaranteed immediate payout task). Next, participants were asked to what extent they felt financially constrained, which served as our manipulation check of financial constraint, measured on a seven-point scale (1: not at all financially constrained, seven: very financially constrained) followed by questions regarding basic demographic information (age, gender, and income). Methods contains in-depth information regarding the participant statistics, and SI Appendix contains more details on the materials that were presented to participants.

Results.

The manipulation check confirmed that participants surveyed at the foodbank (M = 5.56, SD = 1.34) felt more financially constrained than did participants surveyed at the golf club [M = 2.98, SD = 1.42; F(1, 155) = 136.69, P < 0.001, η² = 0.469].

We conducted a repeated measures ANOVA on participants’ intertemporal preferences with location and choice task as between-subjects factors and choice scenario as a within-subjects factor. We observed significant main effects of location [F(1, 153) = 33.28, P < 0.001, η² = 0.179] and choice task [F(1, 153) = 6.00, P = 0.015, η² = 0.038], which, as expected, were qualified by their interaction [F(1, 153) = 7.61, P = 0.007, η² = 0.047; Fig. 3].

Fig. 3.

Participants’ relative preference for the larger delayed option over the smaller immediate option by survey location and type of intertemporal choice task (Study 3). Error bars represent SEMs.

When intertemporal preferences were elicited with the classic task (all now versus all later), participants surveyed at the foodbank were more present focused than those surveyed at the golf club [M_foodbank = 3.03, SD = 2.46; M_{golf club} = 7.51, SD = 3.48; F(1, 153) = 36.08, P < 0.001]. When a guaranteed immediate payout was added to all options, this difference persisted but was significantly less pronounced [M_foodbank = 5.77, SD = 3.69; M_{golf club} = 7.35, SD = 3.35; F(1, 153) = 4.57, P = 0.034]. Furthermore, guaranteeing an immediate payout resulted in more patient choices by participants at the foodbank [F(1, 153) = 13.30, P < 0.001] but did not affect those at the golf club [F(1, 153) = 0.05, P = 0.826].

Finally, the choice scenario had a reliable main effect [F(2, 306) = 44.405, P < 0.001, η² = 0.225; individuals were more patient in scenario 1 than in scenarios 2 and 3] but did not interact with the other factors (all P values > 0.05)

Discussion

Existing research in intertemporal decision-making has traditionally relied on a choice paradigm that urges participants to make a series of choices between smaller, sooner and larger, later monetary rewards (e.g., $100 now versus $200 later)—assuming that these choices provide insight in individuals’ true time preferences for sooner versus later payoffs. Within this literature, the general observation is that financially constrained individuals are more likely to suffer from myopia—thus preferring an immediate smaller payoff over a future larger one (2–8). However, across three studies, we observe that introducing a small change to this choice paradigm—i.e., adding a guaranteed payout to both choice options—significantly impacts choices, particularly those of financially constrained individuals. Specifically, when an immediate payout—even a small amount—is guaranteed, financially constrained individuals are no less patient than their affluent counterparts.

Our observations have several implications. First, if adding a guaranteed payout to both choice options enables financially constrained individuals to decide in a less myopic manner, this suggests that the traditional choice paradigm might not be capturing true time preferences but rather reflect a—sometimes necessary—preoccupation with pressing, immediate needs. As such, our findings add nuance to the interpretation of previously documented findings using traditional intertemporal choice tasks.

Second, our findings indicate that financially constrained individuals do care about spending their (scarce) financial resources in a future-oriented fashion. This is in line with prior research showing that constraint can trigger a concern for the future (15–18) but also with research showing that constrained individuals are responsive to changes in investment conditions (e.g., interest rates; 23). As such, constrained individuals are also motivated by long-term concerns, even though existing intertemporal choice tasks may fail to fully capture these (and thus portray the financially constrained as overly myopic).

Third, our results stress the importance of using intertemporal measurement tasks that mimic the focal decision situations (i.e., all now versus all later or some now and some later) and suggest possible interventions for those who care about reducing the myopia of financially constrained individuals (in all now versus all later decision situations).

Our work also has limitations. First, we acknowledge that, similar to prior research, well-documented potential concerns [i.e., arbitrage opportunities and liquidity constraints (19, 22, 26, 30–32)] might partially confound the interpretation of our measures—though they are unlikely to explain the observed interaction between constraint and the guaranteed payout. Particularly the results of Study 2—which randomly assigns participants to constraint conditions—cannot be easily explained by differences in arbitrage opportunities or liquidity constraints. Furthermore, we acknowledge that there is a difference in experimental income across our conditions, which might bias our observations if a higher experimental income helps participants make more future-oriented choices. However, given that our observed effects did not differ by the amount of the immediate payout, it is unlikely that they were driven by liquidity relief. Still, it would be useful to extend our research with choice scenarios that keep experimental income constant across all conditions.

Second, in line with refs. 33 and 34, we chose to work with hypothetical choice tasks. We acknowledge that this might be a limitation. At the same time, real choices may introduce other issues (i.e., participants might be unsure about their long-term payment, might consider transaction costs, or wonder about delays)—which can be assumed to be especially worrisome for financially constrained individuals (21).

Lastly, the tasks in this paper are limited to immediate payoffs, even though much prior research used near-future payoffs instead (23, 26, 37). Yet, our findings suggest that guaranteed immediate payoffs—almost symbolic in terms of magnitude—may exert their effect by assuaging a motivational conflict rather than by meaningfully satisfying an objective need. Given the emotional, fundamentally motivational, character of this immediate payoff, one can expect that our findings may not generalize to these near-future guaranteed payouts (25). To some extent, the work of Urminsky and Kivetz (37) also supports this view, as they found no evidence for an interaction between the issuing of a guaranteed sum (after 3 d) and income level—which could be considered an indicator of constraint (37).

To conclude, the current research qualifies prior demonstrations of myopic financial constraint—oftentimes relying on traditional smaller, sooner versus larger, latter tradeoffs. When an immediate payout is guaranteed, financially constrained individuals are no more myopic than their more affluent counterparts. This is consistent with recent findings showing that feeling financially constrained does not necessarily reduce concern about the future (15–18) and suggests that the traditional intertemporal choice paradigm might not accurately capture time preferences, particularly for financially constrained individuals.

Methods

All experiments were conducted with the informed consent of our participants, who were free to withdraw from participation at any time. Only individuals who voluntarily entered the recruiting database were invited, and informed consent was indicated by electronic acceptance. The experiments were conducted following the peer-approved procedures established by Maastricht University’s Behavioral and Experimental Economics Laboratory (BEELab). Our study was approved by the BEELab at a public ethics review and project proposal meeting that is mandatory for all scholars wishing to use the BEELab facilities or run online studies approved by the BEELab. Instructions and stimuli for studies are available in SI Appendix.

Study 1.

We recruited 251 (M_age = 39.25 y, 49.4% women) participants with an income of <$30.000 on Amazon’s Mechanical Turk. Out of these participants, 26 failed the attention check and 40 did not receive a paycheck, leaving us with a final sample of 185.

Study 3.

We recruited 161 participants (59.6% female, M_age = 45.63 y). The average monthly income for the nonconstrained [constrained] group was €6,000 to €7,999 [€500 to €999]. We did not have an attention check for this study. We excluded four outliers that were more than three SDs from the mean (intertemporal preference in choice scenario 1 [2, 3] in each of the four conditions), leaving us with a final sample of 157 responses (average monthly income for the nonconstrained [constrained] participants remained at €6,000 to €7,999 [€500 to €999]).

Data Availability

All study data (SI dataset study 1; SI dataset study 2; SI dataset study 3) and code (SI Appendix) are included in the article and/or supporting information (Supplementary Materials).