Hyperbolic discounting may sound like a super-charged holiday sales technique, but in reality, it’s a phenomenon that leaves us vulnerable to making poor impulse choices and sabotaging our goals. Here’s what it is, and seven ways to turn this dangerous penchant into a tool to help us make smart decisions.
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Which Would You Rather?
Quick: Would you rather have $50 right now, or $100 in a year?
If you are like most people, you’ll take the $50 cash now, thank you very much. That’s because of a thing called hyperbolic discounting.
A behavioral economics term first coined by psychologist Richard Herrnstein in 1961, hyperbolic discounting is the idea that given two similar rewards, we tend to prefer the one that arrives sooner over the one that comes later.
Beyond that, the time delay causes us to lower our perceived value of the later reward. So even when we double the later reward to $100, most people would still rather have the $50 now. That’s how much we discount the future amount. It’s not worth the extra fifty bucks to wait. This applies to almost any reward, not just money.
But why is this so? It may have to do with urgency of need – I’m hungry now; the rent is due Friday. It could also be due to uncertainty about the future – will you really be around to pay me $100 a year from now? Will you remember that you promised?
It seems to be tied to that old saw: “A bird in the hand is worth two in the bush.”
OK, here’s a similar question, but with a twist.
Our Future Rational Selves
Would you rather have $50 five years from now, or $100 in six years?
The answer to this one highlights an inconsistency in our view of time: Most people would choose to wait an additional year in the future to double their money, even though they are not willing to do the same thing this year.
That’s where the hyperbolic part of the term comes in. It refers to the fact that the discounting effect does not steadily diminish at a constant rate over time – it drops very quickly at first, then levels off, similar to the arc of a parabola. We perceive the difference between now and 12 months from now as much larger than the 12 months between years five and six, even thought the time span is the same.
It seems that our future selves are more patient and rational than our current selves. When both birds are in the bush, we don’t seem to mind waiting a little longer for a larger reward.
Giving Us the Bird
One way marketers exploit hyperbolic discounting is to magnify the idea of “now” by practically putting the bird directly in our hands – it makes temptations that much harder to resist. This approach ties into the dictum that “naughty goods are sold in small packages,” and put right in front of us. Researchers found that people will often buy tempting goods in small packages for more money, even when the same item is available in bulk for less per item elsewhere in the store.
Just yesterday in the check-out line I saw a full-sized Hershey bar selling for “only” $1.26. I decided to step out of line and see for myself. Sure enough, two aisles away, it was available in a package of six for $3.99; that’s $0.66 per bar – half the cost. And yet we buy.
There are lots of other ways marketers use this tendency of ours to their advantage (and our potential detriment). Payday loan shops offer cash now. We can get a new set of wheels for “no money down.” The aroma from the pretzel kiosk at the mall makes us forget about our weight loss plans. We buy one more item on line so that we qualify for free shipping. We’re bombarded with temptations like this all the time.
We can even blame hyperbolic discounting for our procrastination – when we put off a task, we are prioritizing the immediate gratification of not undergoing an unpleasant experience now, over the future reward of completing the task.
The problem with all of this is that we are tempted to over-value options that that put things in our hands in the near-term, and that’s even though we know we’ll end up paying a greater cost down the road. We take the cash or the car, but pay higher interest on the loans. We buy the single Hershey bar and end up paying for a new suit we can fit into for our friend’s wedding. We put off home maintenance all year, and now we have to replace the HVAC.
The good news is that, being aware of this self-sabotaging tendency of ours, we can also turn it to our benefit.
Making Hyperbolic Discounting Pay
Here are a few ideas that we can use, both personally and as leaders, to help us stay on track and make smart choices.
- Increase visibility. Make important goals and rewards visible, physical, and close: display tracking charts prominently to show progress; showcase the trophy the team can win where everyone can see it.
- Speed up the reward cycle. Give praise, awards and recognition as soon as possible following the action that earned them; though hyperbolic discounting, we know that we can offer less reward this way, yet it can mean more (here are some reward ideas).
- Make short-term rewards for long-term projects. Set it up so that near-term rewards we are tempted by support the long-term goal: recognize and celebrate frequent milestones, post a positive progress update to social media, or establish a “token economy” so that for each achievement people get tokens they can trade in for bigger ticket items later on, kind of like a loyal customer punch card.
- Move the poor choices farther away. Hide the bag of chips in the back of the pantry, or don’t let them in the house at all. The harder it is to stray, the easier it is to stay on track.
- Defeat procrastination. On our to-do lists, we can use some activities as a reward for completing others. As Mark Twain is reputed to have said, “If it’s your job to eat a frog, it’s best to do it first thing in the morning. And if it’s your job to eat two frogs, it’s best to eat the biggest one first.”
- Use “priming” to choose wisely. Studies have shown that when exposed to words like “future,” “long-term,” and “self-control,” before making a decision, subjects were much better able to resist short-term temptation. We can write these words down in a notebook before a big decision, or put them in places where we may face a choice, like the refrigerator door.
- Ask someone more rational. Since we know that our future selves are smarter about these kinds of things, we can imagine the person we want to be five years from now, and get their thoughts on what choice to make today.
Hyperbolic Discounting – The Takeaway
Most of us seem to be hard-wired to value lesser things that we can have immediately over something more valuable in the future. After all, we can’t eat any of the birds if they are still in the bush, and if there is to be a tomorrow, a guy’s gotta eat.
Still, recognizing that we have this tendency, there’s a lot we can do to resist the temptations it represents. Even better, we can turn it to our advantage to help us make smart choices.
Whether we are trying to achieve personal aims, or focus the team on a key long-term goal, success begins by recognizing this built-in bias. If we can figure out how to make the closest reward one that supports the long-term objective, we will succeed.
And when we find ourselves facing choices, whether in the check-out line or in the board room, the best thing to do may be simply to ask, “What would my future self do?”
Note: If you have goals that you are serious about achieving, check out my Goal-Setting Mastery Course for lots more ways to not only set good goals, but stay on track long enough to attain them. The first several videos are free (see what I did there?)