Hyperbolic Discounting (Cognitive Bias #9)

August 16, 2006

This is the tendency for people to value more immediate payoffs higher than remote payoffs.

Sort of makes sense, right?  I’d prefer to get $5 today than $5 tomorrow.  But would I rather get $10 today or $11 next week?  Or would I rather get $500 today or $1,000 a year from now?  In all three cases I’d probably take what I could get now rather than wait for the bigger payoff in the future.
However, the other twist is that this bias diminishes if both payoffs aren’t that close to the present.  For example, I’d rather take $1,000 5 years from now than $500 4 years from now.  As long as I’m waiting 4 years, might as well wait the 5th for twice as much.  But if you compare it to the example in the paragraph above, you’ll see how this logic seems to flip flop a bit.  In both cases waiting a year could gain me $500, but waiting a year right now seems harder than waiting a year 4 years from now.  Hence the hyperbolic nature of this bias… it slowly twists over time.  It’s irrational because you treat the same problem differenly depending on an arbitrary variable (its nearness in time to you).
Marketers can take advantage of this bias by offering you something small now in exchange for something bigger later.  Credit cards, banks, and loan companies seem to thrive on this bias alone.

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