Hyperbolic discounting

From Decoded, by Phil Barden.

“Getting ill in 20 years is not as threatening as having a headache tomorrow. We usually prefer smaller, more immediate payoffs to larger, more distant ones. The offer of £100 today maybe preferred to the promise of one of £120 next year. Behavioural economists refer to this as ‘hyperbolic discounting’: we have a very high discount rate for the future compared with the here and now. This is why we discount the future very heavily when sacrifices are acquired in the present, such as stopping smoking or exercising more often. We recognise this from our own experience: we all know that we should adopt a healthier lifestyle in order to prevent illness in the future, but this consequence is not currently perceivable to us and this allows us to opt for the cigarette and the better because their value is available to us right now. This future discounting is the reason why we tend to spend more when using credit cards – the pain of paying is deferred to some future moment.”

Simply put, the more distant a gain is the more we discount its value.

Hey. I’m Alex Murrell. I'm a Planner at Epoch Design in Bristol where I help deliver highly creative, innovative and effective pack, instore and online communications for some of the world’s biggest FMCG brands. Want to know more? You can find me on Twitter or LinkedIn.

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