” Without a sense of urgency, desire loses its value.”- Jim Rohn
A common thought in the minds of people who are trying to stay fit is, ‘’ I’ll eat pizza today and work towards becoming healthier from tomorrow.’’ We can all relate to this feeling. The urge to have, eat, watch or do something right now is a weakness that most of us are unable to control. Although it might look like a trait each individual possesses by default, there is a psychology behind it. Psychology explains why immediacy is preferred over having a larger benefit in the future. The instant gratification of that pizza sure had value but not eating that pizza and staying healthy in the future had a much larger value. The term ‘’Hyperbolic discounting’’ can be used to understand this flaw in the human mind which leads us to make many such decisions.
Hyperbolic discounting put in simple terms is that one would want $30 now as compared to $60 after 3 months. Basically, time is more important in making a choice as compared to the value of the options. However, this is not constant. Once a certain amount of time has passed people give more importance to the value. For example, if one has a choice between $30 in 5 years over $60 in 6 years, people would choose the latter. This is because where they can wait for 5 years, they definitely can wait another year for twice the value. This is where the hyperbola part comes in. Due to the inconsistency of choice, the curve representing it is a hyperbola. Discounting refers to the reduction in the value of an option due to the delay in receiving the benefits.
As mentioned before, it is not something that just happens due to a lack of logic. Logically, one can wait 3 months for twice the value but doesn’t. This is not because someone isn’t smart enough or isn’t able to understand what will be more beneficial in the long run. One does. Yet the wrong choice? The reason behind this is ‘cognitive bias.’ Cognitive bias is the error that the human mind commits due to the simplification of information provided. It could also be because of wanting to make the decision quickly.
The world is a complex place and every day one is provided with many decisions to make. Our brain has been trained to try and simplify the choices and make a decision as quickly as possible. This leads to choosing the less beneficial option. There are various habits that show that one is influenced by cognitive bias such as reading and appreciating news that confirms your beliefs, assuming that you succeeded due to your efforts while others because of luck.
The uses of hyperbolic discounting are prevalent in each economy.
The marketing world knows how to levy human psychology to its benefit. The ‘limited time offer’ is one such example. When one is offered free shipping for a limited time, the urge of immediacy is awakened. People tend to shop much more to save on the shipping price right now rather than thinking about saving for the future. It might seem like an easy hack but the E-Commerce industry is flourishing because of such tactics.
Another one could be the point system. How many times have you used an app and for each purchase you get points. A certain number of points will ultimately give you some benefit like a discount, a gift or maybe even cashback? Isn’t that an amazing offer? No, it is actually not. companies play with the human minds and gain benefit by tempting you to spend now although you can save for the future and later buy things which are actually needed.
There are countless examples of the economic uses of this behavioural trait of humans.
Another, which one is always quite oblivious to, is loans. When a bank provides you loans they are feeding your current consumption demand. The now is more important than the value one will receive in the future by not spending that amount. A loan today sometimes leads to paying it off forever.
The less explored understanding of this phenomenon lies in our everyday life. There are innumerous examples where we make a choice, often wrong due to hyperbolic discounting. Though the following examples might seem to bring out the negative aspect of this cognitive bias, the intention behind it, is to just apply this multifaceted theory to random activities. It could be a possible reason or a driving force for the following choices.
Procrastination is something one practices on a daily basis. The choice to binge-watch right now and do the pending task later again shows the preference of the instant gratification from ‘’chilling’’ rather than the benefits that could be reaped in the future. Netflix sure has no problem with this. It is the hyperbolic discounting that forms the basis of such choices and decisions.
Another situation that is seen on a daily basis is in the environment. Everyone knows that conserving water will have a much larger benefit for us in the future. Especially today when this future is no longer ‘’distant’’ as resources have been exploited and soon will run out. Yet one chooses to wastewater while having a long shower or playing with it in festivals. The value we get right now overpowers the much greater value we could get in the future.
Hyperbolic discounting can be used in many more day-to-day activities. Students often drop out of school because they assume they are prepared for the future and know exactly how to be successful. The value they get initially by starting their own business is often lesser than what they could have got if they had stayed in school and finished their preliminary education. The benefit of education is much more than just to help in being financially independent. In the future, it helps one think rationally, in a secular manner, without prejudices and biases. Social behaviour and norms are learnt through education.
Economists have often used this phenomenon to understand the trends in the banking, E-commerce and marketing world. Through the understanding of this theory, we can make more informed and conscious decisions on a regular basis and gain more control over our minds eventually.
The undiscovered part of it lies in our personal choices which we make for our own growth, development, well-being, health and happiness. The intersection of it with the economy is easy to grasp but this theory is so dimensional that its impact can be seen from a social, political, economic and financial viewpoint. The social and personal dimensions can be broken down by applying it to basic activities like above. Small or big, its role can be seen by deciphering the thought process behind our choices.
By Manavi Kumar