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Hyperbolic discounting
Explanations > Theories > Hyperbolic discounting
Description | Research | Example | So What? | See also | References
Description
Given a choice, we choose a small benefit in the short term over a larger benefit in the longer term.
However, if all choices appear to be in the longer term, larger benefits will be chosen, even if these appear even later than the smaller benefit.
The name 'hyperbolic' comes from the fact that when plotted on a graph, the change in preferences for short and long-term gives a hyperbolic shape over time. This reflects the way we that value things is inversely proportional to delay.
A contributory reason for this may be that our perception of time is non-linear. The year ahead seems quite long, whilst a year in ten years time is conceived as being shorter. In our conception of time, we often use a 3-D visual representation, in which the effects of perspective foreshorten more distant periods.
Research
Ainslie showed that this effect happens with pigeons, implying that it was a deep instinct.
Example
If you were offered the choice between $50 now and $100 a year from now, most would ask for the $50.
However, given the choice between $50 in nine years or $100 in ten years you would be likely choose the $100 in ten years.
So What?
Using it
Offer immediate payment and you may well get a discount. When selling, you can sell for a higher price if you allow the other party to pay later.
Defending
Be rational about the utility of things. When offered 'pay later' deals, understand the real effect on your finances.
See also
References
Chung and Herrnstein (1967), Ainslie (1974), Ainslie (1975)
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