Is it more rewarding to seize the now, or look ahead toward a brighter future?
Are you an impulsive spender, or Can you resist the urge to splurge?
Do you constantly reach for that latest purchase, no matter how badly your bank account may be hurting?
If so, then you might be the victim of “Hyperbolic discounting.”
Learn more about cognitive biases like hyperbolic discounting, who is most vulnerable to this type of thinking, and how to safeguard your decisions from the effects of cognitive biases.
Understanding the “Hyperbolic Discounting“
Hyperbolic discounting is when people want something right away, even if it is not as good as something they could get later. They might make decisions now that do not help them in the future.
Shoppohollics buy items they don’t need to get a short-term thrill while ignoring the potential financial damage resulting from impulse purchases. Likewise, someone who enjoys gambling may focus on the excitement of winning money in the short run while disregarding the potential financial losses that could arise over time.
In both these cases, hyperbolic discounting fetches immediate rewards for their activities rather than the potential long-term advantages of saving their money or investing it wisely.
Children also tend to demonstrate hyperbolic discounting by being more driven to make decisions that lead to short-term rewards, such as playing video games or eating junk food, than making choices with long-term benefits, such as studying for a test or participating in fitness activities.
This behavior is often seen during small tasks and activities where the child has to choose between two options: A smaller reward now or a larger reward later.
Exploited and Exploiters
Victims of hyperbolic discounting are those who make impulsive decisions, such as taking on debt to purchase items they can’t afford or skipping their savings goals to splurge on something that provides an immediate reward.
On the other hand, those who take advantage of this cognitive bias are usually companies offering products and services with an initial low price or minimal effort in exchange for long-term financial commitments. By using hyperbolic discounting to their advantage, businesses can convince customers to make financial decisions that limit their long-term freedom or security.
Day-To-Day Hyperbolic Discounting
- Taking out loans to buy a car you don’t need, despite knowing that the long-term payments will be painful and you are low on cash reserves!
- Spending too much money on furniture for an apartment you’ll only be living in for a few months.
- Using online coupons or sales offers to purchase items you would not normally buy if given full-price options.
- Eating fast food because it’s convenient and cheap, although healthier alternatives may be available for similar prices.
- Choosing to watch TV shows instead of going outside when deciding between the two activities.
Recognizing When You Are Slipping Into The Hyperbolic Discounting Trap
There are a few key signs that you may fall into the hyperbolic discounting trap. These include:
- Making decisions based solely on immediate gratification and not considering the long-term consequences of your decisions.
- Impulsive purchases or taking out loans to buy items that, in hindsight, you don’t need or can afford.
- Prioritizing short-term goals over long-term ones, even when it is clear that the long-term goals would be beneficial in the future.
- Choosing to engage in activities with immediate rewards over delayed but important ones.
- Being unable to delay pleasure despite knowing it could have negative impacts later on.
Overcoming the Hyperbolic Discounting
- Take time to pause and weigh out the pros and cons of each decision.
- Visualize the long-term effects of decisions before taking action.
- List the steps to achieve desired outcomes for a particular goal or purchase.
- Set limits on spending, be it daily, weekly, or monthly to discipline yourself when making decisions in the present moment.
- Create psychological distance between oneself and immediate temptations by temporarily removing credit cards and cash from your wallet.
- Reframe current decisions as future ones: Ask yourself, “One year from now, would I still be ok with this decision?”
- Hold off on impulsive purchases by waiting 24 hours after considering a new item to decide whether or not you actually need it or want it.
Final Thoughts
Hyperbolic discounting has implications in many areas of life, such as personal finance, addiction, and public policy. For instance, in personal finance, hyperbolic discounting can result in people not saving enough for their future needs, such as retirement.
In addition, hyperbolic discounting can explain why people with drug or alcohol addiction may prioritize immediate pleasure over long-term health consequences.
The reason why hyperbolic discounting occurs is due to the way our brains process time and uncertainty. Our brains are hardwired to prioritize immediate rewards, which might have been an adaptive trait from an evolutionary standpoint.
However, it can lead to irrational decision-making in modern society, where many important outcomes require long-term planning and deferred gratification.
Take the case of this bright-eyed graduate, faced with a decision: spend hours honing a skill for a successful career or give in to the temptation of an impulsive buy. But sadly, if he leans toward instant gratification. He wouldn’t know this choice may cost him more than just money. Well, it could hinder his professional growth in the long run. Also, it could cost him his savings.
Overall, hyperbolic discounting is a crucial concept that helps us understand why we often make choices that go against our long-term interests and how we can design interventions to help people make better choices. Each moment presents an opportunity, but only wise decisions taken in the present create lasting success.
Finally
Given that hyperbolic discounting is something we’re all susceptible to, it isn’t hard to understand why so many of us find it difficult to save money despite our best intentions.
Do you have any other tips for overcoming hyperbolic discounting? Do share them with us in the comments section below! Also, subscribe to our newsletter.
Reference
The above article is based on the book Thinking Clearly; this article is here to help us learn and understand how our minds can be tricked by something called cognitive biases.