Hyperbolic Discounting: Why your decisions are already made before you make them

Posted on 07. Mar, 2012 by in Wealth Essentials

Hyperbolic discounting

Did you know that most of the decisions you make in life have already been made well ahead of time?  That split second judgement about selling your shares, your choice of food at a restaurant when dining out and even your decision to quit a bad habit were actually made well before you indicated you choice to anyone, including yourself.

In this post I’m going to cover the concept of hyperbolic discounting and show why you make the decisions you do about all kinds of things that effect your life, especially your finances.

What is Hyperbolic Discounting

Do you often wonder why you have trouble following through on an action when the time comes, even though you always intended to do so?  The cause of this is the diminishing value you place on achieving your goal as time draws closer.  This change in value over time is called hyperbolic discounting.

Example

Maybe you promised yourself a coffee on the way to work if you went to the gym before hand.  The night before this seemed like a very achievable goal and the reward of the coffee would more than compensate your effort of waking up early and doing the hard work.

When your alarm goes off the next morning to wake you for the gym, you hit the snooze button, roll over and go back to sleep – maybe you could just go to the gym after work instead?

Hyperbolic discounting describes the inconsistency in your choices about the same thing at different points in time, this is also referred to as dynamic inconsistency.  These choices require you to evaluate the costs and benefits of a goal or reward and may relate to any number of things, including saving money, exercising, your diet, the amount of work you do and even your relationships.

Enjoy it now and worry about it later

Up to a certain point most people will choose a lesser reward if they can have it today rather than waiting, but if the reward isn’t available for an extended period most people will gladly hold out a little longer in order to receive a greater reward instead.

Hyperbolic Discounting and Your Money

People use hyperbolic discounting to make decisions about money all the time.  They make choices today that their future self would prefer not to make, despite using the same reasoning.

For example, if you offer someone a choice between $100 now and $150 a year from now, many people will choose to take the reward that arrives sooner.  If you use the same figures and delay between rewards, but extend the waiting time before you can have it, something funny happens.  The people that took the lesser reward initially will likely wait for the greater if they are given the choice of $100 in ten years or $150 in eleven years because the extended waiting period changes their perceived value.

You may not think that hyperbolic discounting effects anything you do, but you might be surprised.

when you bid on eBay for example, you start out with a fixed price in mind for a specific item.  As you get closer to the finish time and more people start bidding, your perceived value of the item changes and you decide you could perhaps increase your price in order to win the sale.  The same is true for anything that you might pay more or less for at different times because of the perceived value rather than the true value.

Hyperbolic Discounting and Your Health

We have already seen how hyperbolic discounting can influence the decisions you make about your health.  By discounting the value of your future health, you may make choices that satisfy your immediate needs, but may also have long term side-effects.

For many of us, the most common example is our diet (or lack thereof).  We eat the things that look good, taste good and make us feel good at the time, but don’t really think about the impact of these decisions on bodies in the future (or even how we might feel about those choices later either).

Strangely enough, we can also apply a similar approach to relationships.  Often we have an exaggerated value of “now” so we make decisions (for good or bad) accordingly.  By understanding the effect of hyperbolic discounting we can attempt to put some space between our immediate feelings and those we might have in the future, or even in the past and make a decision that is far more rational.

In both cases asking yourself “how will I feel about this later” is often a good start, but the biased effect of your perceived value may be difficult to combat.

Hyperbolic Discounting and Your Habits

Knowing the degree to which you discount is very important in understanding your habits and influencing your choices, especially in the discounting of rewards associated with money.  Most of us have a tendency to favour things which are pleasant in the short term, rather than those which are seen as valuable in the long term.  So in order to improve our habits, we need to understand and control our desires.

Because you are already working against a preference for one option over another, you need to find a mechanism that enables you to tip the balance.  If that coffee wasn’t enough to get you out of bed, then perhaps you need to try something that isn’t as easy to discount.  What about a bigger, more desirable reward if you make every gym class for a week?

The level of discounting varies for each of us, so get to know your triggers and find a suitable mechanism to help you achieve the desired result.

Can you think of any examples where you have used hyperbolic discounting to make a choice that seemed perfectly reasonable to you at the time, but that you questioned later?

Image by InaFrenzy

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31 Responses to “Hyperbolic Discounting: Why your decisions are already made before you make them”

  1. MoneyConeNo Gravatar

    08. Mar, 2012

    Gym is a perfect example of hyperbolic discounting! Maybe dieting to a certain extent.

    Quite a fascinating read!

    Reply to this comment
  2. What you wrote about people wanting a lesser reward now reminded me of a study I recently read – children were offered a donut now, or two donuts if they could wait 15 minutes. Big surprise – most kids went for the single treat!

    Reply to this comment
    • Money CactusNo Gravatar

      09. Mar, 2012

      You are right Elizabeth, hyperbolic discounting is very similar to delayed gratification. I’ve written about that in the past and included a fun video about kids and marshmallows. You can see it in the list of related posts at the bottom of this post.

      Reply to this comment
  3. Great post. It reminds of the valuable things I learned from the book the “Happiness Advantage” by Shawn Achor. To overcome the “hyperbolic discounting” *(this term is new to me) he has the “20 seconds” principle.

    It says that you should make it as easy as possible for yourself to do the actions that you told yourself you would. Prepare in such a way that it adds 20 seconds to do something that you want to avoid.

    And shave off 20 seconds of the time it takes you to do what you intended to do. For example: you want to go the next morning to the gym: prepare your gym clothes already (or in the worst case… sleep in them).

    Reply to this comment
    • Money CactusNo Gravatar

      11. Mar, 2012

      Haha, sleeping in your gym clothes is pretty extreme! Great example of a mechanism to tip the balance though, if you wake up dressed for the gym it is probably easier to go than to get undressed!

      Reply to this comment
  4. Roshawn @ Watson IncNo Gravatar

    11. Mar, 2012

    Great post Shaun. It does remind me of a lot of what goes on in my head with regard to that extra piece of cake or other dessert. The intention is always, I won’t do it because there’s no good reason. I value the health benefit of “deprivation.” However, the once I’m in the thick of the decision, it is a lot harder. I value instant gratification more at that moment.

    Reply to this comment
    • Money CactusNo Gravatar

      11. Mar, 2012

      Thanks Roshawn,

      I think that it is a pretty interesting the way people approach their decisions, it’s pretty hard to say no to cake though ;)

      Reply to this comment
  5. Dannielle @ Odd CentsNo Gravatar

    12. Mar, 2012

    Very interesting post. I like. Some nights I promise myself to wake up at 5 am the next morning to study. I even set my phone alarm to wake me up. However, most times when that alarm goes off, I turn it off and go back to sleep. :( But, when it comes down to crunch time, I’m up at 4, ready and willing to go.

    Reply to this comment
  6. UntemplaterNo Gravatar

    12. Mar, 2012

    I’ve definitely had days where I’ve hit the snooze and postponed things I had intended to get done. I try to check my to do list multiple times a day to keep pushing myself forward. Even if I only do an errand instead of doing actual work I need to do, at least I get to cross something off my list! -Sydney

    Reply to this comment
  7. AverageJoeNo Gravatar

    13. Mar, 2012

    Interesting read. I find myself having to guard against that all the time, especially since I’m a runner. It’s always not a big deal if I miss out on a run today if I just make up for it tomorrow…. yeah, right.

    Reply to this comment
  8. Invest It WiselyNo Gravatar

    14. Mar, 2012

    Very interesting post. However, when it comes time to put money where your mouth is, it seems people will not discount as much. Why, cause others with a lesser discount will make money off of them. ;)

    Reply to this comment
  9. Money For BobaNo Gravatar

    15. Mar, 2012

    This explains a lot in my life! Thanks for identifying it- maybe now that I know the source I can tackle the target of instant gratification smartly =)

    Reply to this comment
  10. Bethy @ Credit KarmaNo Gravatar

    15. Mar, 2012

    This is such a great post, and so true. I can especially relate to the example of hitting the snooze button, regardless of the fact that I promised myself I would get up and workout. Hint: You’ll almost never choose to workout at the end of the day if you can’t get yourself to do it at the beginning.

    It offers a good challenge of trying to overcome your own “hyperbolic discounting” in lots of areas of life.

    Reply to this comment
    • Money CactusNo Gravatar

      15. Mar, 2012

      Good point about not following through at the end of the day, I usually make excuses about being too tired etc. so first thing is always best.

      Reply to this comment
  11. FawnNo Gravatar

    15. Mar, 2012

    Interesting, indeed. I have two mechanisms I use.

    1.) Delayed gratification- I don’t say no to the cookie, I say “You can have it in an hour.” That usually results in me NOT going back to the cookie and me being able to subside the need for it immediately.

    2.) I realized that I used to THINK so much about going to the gym (or cleaning out that closet, etc) and what I could be doing instead or why I shouldn’t go. Now, I write down the three times I’ll go each week in my planner on Sundays and I don’t look back. I literally don’t give it any thought, intentionally. If it says, “7 am gym” I do it. It’s not optional or negotiable so why give any time or energy thinking about it. The latter has been a very powerful tool for me so I hope it makes sense to you!

    Reply to this comment
    • Money CactusNo Gravatar

      15. Mar, 2012

      I really like your approach Fawn, it makes total sense and I do very similar things myself. Being able to reason with yourself is a great skill, but if you can’t do that find ways that give you no other option ;)

      Reply to this comment
  12. clickNo Gravatar

    31. May, 2012

    Oh man! This blog site is awesome! How can I make it look like this !?

    Reply to this comment

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