Behavioural Economics - What is Hyperbolic Discounting?

Hyperbolic discounting is a behavioural phenomenon where people give more weight to rewards or costs that are closer in the present than those that are farther in the future.

This means that people tend to be more willing to take a smaller reward that is available immediately, rather than waiting for a larger reward that is available at a later time.

For example, a person might choose to eat a piece of chocolate cake right now, even if they know that it would be better for their health to wait and eat an apple tomorrow. They have a strong preference for immediate gratification?

This is because the pleasure of eating the cake is more immediate, while the benefits of eating the apple (such as improved health) are farther in the future.

Hyperbolic discounting - debt and saving

Another example of hyperbolic discounting might be a person who decides to take out a loan with a high interest rate because they need the money now, even though they know that it would be more financially beneficial to wait and save up the money over time.

Present bias

Present bias is a type of bias that refers to the tendency for people to give too much weight to the present and not enough weight to the future. This can lead people to make decisions that are not in their long-term best interest, because they are overly focused on the short-term consequences of their actions.

One example of present bias might be a person who spends all of their money on immediate pleasures (such as going out to eat or buying new clothes) rather than saving for the future (such as saving for retirement or an emergency fund).

Another example might be a person who procrastinates on important tasks because they are more focused on the short-term pleasure of not having to do the work right now, rather than the long-term benefits of getting the task done. Present bias can lead to a variety of problems, such as financial difficulties, relationship problems, and career setbacks.