Hyperbolic discounting

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Assume people are ordering movies that they will receive days later (for example: ordering on amazon.com) they focus on what they focus more on what they think they “should” watch. For instance: documentaries and art firms. Nevertheless, once the movies arrive, they choose films that they “want” to see (e.g. comedies and romance movies). The “should” movies stay in homes without being played.

Furthermore, researchers investigated how consumers place an order that arrives in a few days. As time between orders and requested delivery increases, consumers spend a higher percentage of their “should” items (such as vegetables) than the “want” items (such as ice-cream). This again should the effect of hyperbolic discounting.

When consumers are making decisions about future decisions, they focus on what they “should” do. However, when they make decisions in the present, consumers are more likely to do what they “want” to do.

The impact of temporal differences

Economic concept of discounting states that any choice that involves a trade off between current and future benefits should discount the future to some extent.

Rational decision maker discount future using exponential discounting i.e. discounting each future time period by some percentage. However, human beings have self-control problems such as laziness, procrastination and addition. This can produce choices that reflect hyperbolic discounting. We view all gains and losses in the future to be worth less than they would be in the present. In other words – we are biased towards present.

Neglecting both: future pain and pleasure

People are willing to pay to enjoy rewards immediately. They become much less willing to pay when the anticipated outcome is further in the future than when it is closer to the present (even though the amount of time is the same in both instances). Emotionally, the near future is more interesting, motivating and compelling than an uncertain someday.

Hyperbolic discounting affects our treatment of valuable resources. We make decisions that are in consistent with our views. For instance: rather making decisions aimed at sustainability that concerns future generations, we discount future and consumer environmental resources. Additionally, homeowners fail to buy more expensive, energy efficient appliances, even if they recoup the extra costs in less than a year.

This can also be observed in 2008 financial crisis. Real estate developers built more houses, people took out mortgages, this resulted in a house bubble, individuals were not able to repay the loans and the whole system collapsed. Short-term decision makers failed to anticipate long-term negative consequences.

Adapted from

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

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