What is Hyperbolic Discounting? (Explain to me as if I were a 7 year old Series #5)
Hyperbolic Discounting may sound mathematically intimidating but let me try to explain it to a seven year old.
Imagine gathering seven year olds and asking them, “Would you like to receive…”
Option A: a small box of chocolates now? or
Option B: a large box of chocolates after one week?
They would probably take Option A: a small box of chocolates now.
Then ask them again, “Would you like to receive…”
Option A: a small box of chocolates after one year? or
Option B: a large box of chocolates after one year and one week?
They would probably pick Option B: Large box of chocolates after one year and one week.
The thing is even if you ask highly educated adults, the answers will be no different from the seven year olds’. Why? Why should the answer be different in the two scenarios when the delay in the time of receiving the large box of chocolates is the same – i.e. one week?
This is Hyperbolic Discounting. It is the human tendency to choose a smaller but sooner (now) reward over a larger but later reward.
When the two options are far off in the future as in scenario 2, we are able to make rational decisions. The one week difference is worth the wait to get the large box of chocolates. But when it comes to choices involving our present behavior as stated in scenario 1, our emotions rule!
The larger but later reward is significantly “discounted” in our decision-making and fails to motivate us to make the right choice because the lure of the now pleasure or reward is so tempting that it plays a much heavier weight in what we choose today! We are present-moment biased.
This, dear readers (whether you’re seven or 97 years old), happens all the time. Let me show you two basic examples most important in our lives:
- Eating well. Everybody knows that home-cooked healthy meals are best for us. We say to ourselves, “Starting (insert later date here) I will eat well.” And yet, come the regular work weeks into the year we succumb to the temptation of unhealthy fast food meals. Or we give ourselves way too many treats. The ease of purchasing what’s fast and cheap, and indulging in sweets and other rich goodies now are too hard to resist that we “discount” the value of a healthy old me in the future in favor of a happy young me right now.
- Saving and Investing. Of course we all know that we have to save and invest regularly as early as possible for a financially healthy old me, but do we? Nope. The lure of shopping, travel, and other indulgences, coupled with the ease of swiping credit cards now, are way too hard to resist that we use the #Yolo Excuse (You Only Live Once) or the #IDeserveThis in favor of the financially healthy old me who will not be a burden to relatives in the future.
So you see, this hyperbolic discounting is the culprit why we always procrastinate! I’ll be a good boy/girl…in the future, not today. Later na lang. I’m sure the two examples above are way too familiar with you. They are universal examples and all of us are guilty of them a few times in our respective lives, this writer included.
The holidays have been a nonstop eating and no exercise season and I also find myself gaining inches around the midsection. I’m sure a lot of you are in the same situation. So what do we do to combat hyperbolic discounting?
- Reboot and set deadlines and rules. Quickly get rid of all the Christmas goodies and implement healthy eating soon. Use your special occasions to attend like weddings, etc. where you will have to wear body hugging clothes as your deadlines. In my case, we had a wedding last Saturday, we’ll have another one this Saturday and some milestone birthdays to attend and they’re acting as my deadlines in going back to my original waistline. (As I’ve discussed, I watch my waistline instead of weight, as it is more effective. Read Balik Bewang). I know it’s hard but it’s better to do it sooner than later. Moms, when you complain about your children’s eating habits, remember that you are in control of what your minors are eating. They won’t be eating too much hotdogs and sweets if these were not available at home.
- Automate saving and investing asap. There is no better way to prepare for retirement than an automatic saving and investing scheme. Look, the stock market dove to the 6,500 levels late last year and people were in worried mode avoiding the market. It’s now up to over 7,200 level and if you only had that system automatically investing for you in place, then you would have taken advantage of those low buying windows. More importantly, automating it allows you to observe the golden rule of personal finance Pay yourself first with ease. While still in school (or maybe straight out of their diapers, as we did) have a saving and investing scheme for your young children so that they will grow up continuing the habit.
- Expose yourself to the dire effects of hyperbolic discounting. Read about people who failed to do the right things in their youth and are now suffering the consequences of their actions (or inaction) in health, wealth and relationship-building. The problem with our human faculties is our inability to see the effect of our actions in the long-term clearly. We don’t feel the pain each time we make a wrong decision and so we succumb to hyperbolic discounting, consequently, making us procrastinate in doing the right things. Nobody gets fat or poor overnight. Discuss with your children cases of bad decisions made, not in a condescending manner but in a learning way so that the unfortunate results of procrastinating being a “good boy/girl” year after year become clearer to them now.
I hope that the next time you’re faced with options whether to do the right thing now or later, you will remember the danger of hyperbolic discounting. Bear in mind that if you continue to allow yourself to be seduced by the pleasure of now, discounting the reward of a better you in the future, you are setting yourself up for a problematic you tomorrow.
Combat Hyperbolic Discounting and save and invest now for a happy you. This can be achieved with the right FQ (both knowledge and behavior). Know your FQ Score now and work your way up to a high FQ Score, click link to take the test. http://tinyurl.com/FQTest
Rose Fres Fausto is a speaker and author of bestselling books Raising Pinoy Boys and The Retelling of The Richest Man in Babylon (English and Filipino versions). Click this link to read samples – Books of FQ Mom Rose Fres Fausto. She is a Behavioral Economist, Certified Gallup Strengths Coach and the grand prize winner of the first Sinag Financial Literacy Digital Journalism Awards. Follow her on Facebook and You Tube as FQ Mom, and Twitter & Instagram as theFQMom.
ATTRIBUTIONS: Discussion of choosing between a small box vs. a large box of chocolates taken from Dan Ariely’s articles, books and videos on the subject matter. Images from Shutterstock, Godiva, All-free-download.com, Clipart Panda, clipartfox.com, Clipartix, clipartkid.com, El Desván Lúdic, olcajudo.webgarden.cz put together to help deliver the message.