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 struggling to maintain an exercise regime to reach an ambitious, distant goal? Well, you’re not alone.

Hyperbolic Discounting is a cognitive heuristic where immediate small rewards are more appealing than distant large ones.

INSTANT GRATIFICATION

In essence, you will ‘discount’ the distant reward by an exponential amount, or ‘hyperbolic’ value, over time. Or, in other words, you will tend to make decisions based on instant gratification... Understandable really, I mean the thing about instant gratification is that it's instantly gratifying!

IN YOUR LATTICEWORK.

This is a fundamental model of behavioural economics, along with the Fast and Slow Thinking model and drives short term thinking that often contradicts rational, long term planning. It is a heuristic, or cognitive bias that has countless implications in sales, habit formation, and behaviours — many of which are explored concretely, and with links to other relevant models, in the Actionable Takeaways below.

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

Organise processes or teams to interrupt this bias and use Slow Thinking to consider options and plan a rational way forward. 

  • For addiction, consider how to break hyperbolic discounting. 

Addiction is a complex phenomenon but is likely driven in part by the drive for immediate gratification over long term rewards. Consider how to counter the immediate pay off with alternative immediate rewards. 

  • For goals, consider focusing on systems versus distant payoffs. 

Use this Systems versus Goals model to focus on the benefits and enjoyment of the journey over a distant end goal. 

  • For habits, consider small, quick rewards for motivation.

Refer back to the Habit Loop mental model. When establishing a new habit, rather than waiting for a distant goal, consider how to incorporate a fast, small pay off. 

  • For projects, break down big goals or problems. 

Consider how to Divide and Conquer large goals or projects to provide you with quick returns and milestones, that will prove more motivating than distant large ones. 

  • For pricing, if you raise costs, delay repayment.

Higher costs might be more accepted when delayed, though this will also play into Loss Aversion

  • For businesses, use a freemium strategy.

Digital businesses now use freemium strategies, or providing free value, as a common strategy. Consider what free and immediate value you can offer to help develop loyal customers — this links to reciprocity as part of Cialdini’s Principles of Influence.

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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. 

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.

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. 

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