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Hyperbolic Discounting
Hyperbolic Discounting
Hyperbolic Discounting
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Overview

So you suck at delayed gratification? Can’t consistently invest your savings for the big pay off for when you retire? Or perhaps you’re ...

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Videamus animi partes, quarum est conspectus illustrior; Quae duo sunt, unum facit. Isto modo, ne si avia quidem eius nata non esset. Nam, ut sint illa vendibiliora, haec uberiora certe sunt. Multoque hoc melius nos veriusque quam Stoici. Ita ceterorum sententiis semotis relinquitur non mihi cum Torquato, sed virtuti cum voluptate certatio. Ex quo, id quod omnes expetunt, beate vivendi ratio inveniri et comparari potest. Qui bonum omne in virtute ponit, is potest dicere perfici beatam vitam perfectione virtutis; Sed quod proximum fuit non vidit. Multoque hoc melius nos veriusque quam Stoici. Haec mihi videtur delicatior, ut ita dicam, molliorque ratio, quam virtutis vis gravitasque postulat. Quamquam in hac divisione rem ipsam prorsus probo, elegantiam desidero.

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Actionable Takeaways
  • For decisions, use slow thinking to interrupt your bias. 

Organise processes or teams to interrupt ...

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Limitations

Some criticise the evidence behind Hyperbolic Discounting as, similar to so many behavioural science research, largely relying on university students as they are a cheap and available group of test subjects. Such critics argue that more experienced and older people consider longer views and criteria for their decision making, though this has not been proven through research yet. 

Other criticisms do not undermine the observed behaviour behind Hyperbolic Discounting — of people choosing instant gratification — rather the reasoning behind it. So, for example, some point to the role of cravings, arousal and emotions in people seeking immediate rewards — though again, in my view this is relatively academic as the end result remains the same.

In Practice

$100 versus $120.

Hyperbolic discounting is perhaps best known for the $100 versus $120 experiment. Participants in this experiment were offered a choice between receiving $100 today versus $120 in a week. Most people would choose the $100 immediately. Then they were offered the choice between $100 in a year versus $120 in a year and a week. From a rational perspective, these questions are identical — yet when adding the ‘year’, most people chose to take the $120 option. 

Climate change. 

This one’s a bit opinionated perhaps, but is it really? It is now pretty clear that climate change is a massive threat to humanity — there, I said it. Yet humans are reticent to act. Compare that to how most governments invested in dealing with the threat of covid when it was having clear immediate impacts. The immediate threat gets the attention, the distant one can be all too easily ignored. 

Build your latticework
This model will help you to:

Hyperbolic discounting is a core model in behavioural economics and has countless implications. 

Use the following examples of connected and complementary models to weave hyperbolic discounting into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above. 

Connected models: 

  • Fast and slow thinking: the model that explains the broader backdrop of heuristics and behavioural economics. 
  • Loss aversion: another fundamental and intrinsically linked model

Complementary models: 

  • Habit loop: particularly B.J. Foggs idea of ‘tiny habits’ or immediate rewards. 
  • Systems versus goals: in establishing the routine over relying on a distant goal. 
  • Divide and conquer: in respect to breaking down large projects. 
  • Cialdini’s six principles of persuasion: particularly in terms of freemium and quick value in relation to reciprocity. 
Origins & Resources

Hyperbolic discounting was built on the work of Richard Hernstein who developed a ‘matching law’ before coining the term ‘hyperbolic discounting’ in a 1961 paper. 

My Notes

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