Why do we value immediate rewards more than long-term rewards?
What is Hyperbolic Discounting?
Hyperbolic discounting is our inclination to choose immediate rewards over rewards that come later in the future, even when these immediate rewards are smaller.
Where this bias occurs
Consider the following hypothetical: John buys a lottery ticket every week. He hopes to someday win big. One fortunate day, against all odds, he does. John is now worth just over $5 million.
After a frenzy of celebrations and hugs, John drove to the lottery offices to claim his prize. When he arrived, the lottery director gave him a choice: he could either claim the $5 million now, or he could choose to receive $250,000 every year for the rest of his life instead. John was only 35. Quick mental math pointed to the second option generating more revenue for John if he lived past the age of 55— which he planned on. But, John imagined having a seven figure total in his bank account and relished at all the things he could buy today.
John decided to take the first option, even though he would receive less money from it in the long-run. His preference towards immediate benefits over future gain can be attributed to hyperbolic discounting.
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Hyperbolic discounting can result in poor decision-making, because it incentivizes impulsivity and immediate gratification.1 Decisions that prioritize short-term gratification often neglect and detract from our long-term well-being. Think of smoking: there is a quick rush of dopamine that is valued over one’s future health. While addiction often plays a role in people’s decision to smoke, nicotine addiction itself has been linked to an undervaluation of delayed, or long-term outcomes (ie. impulsivity).2
Cigarette smoking, like other forms of drug dependence, is characterized by rapid loss of subjective value for delayed outcomes, particularly for the drug of dependence.
– Behavioural pharmacologist Warren K. Bickel, et al."
Another way to look at this, is that hyperbolic discounting can also make us blind to the benefits of long-term decision-making, which can sometimes include gains far greater than those of more immediate decisions. For example, if one had money to spare, it may be wise to invest some of it for retirement. But overvaluing the short term gratification one would get from buying food or clothes may lead them not to invest. This may have been a poor decision, as they would probably have benefited much more from having this money compound interest for their future retirement.
Short-term thinking can have negative implications for all sorts of institutions and professions. Government administrations that prioritize political gain during their term in power can jeopardize the public good for years to come. Likewise, a corporation that only focuses on quarterly profits might not be willing to make costly adjustments in their production or management structure that are necessary for their future profitability. Any profession that requires cost-benefit analysis across time is also affected. Finance is a good example, as investors must evaluate the benefit of high short-term yields that are often high risk, with long-term investments that usually have more modest risk and yields.
The range of inﬂuence of steep discounting on risky health behaviors is so large that interventions that could positively affect the valuation of long-term rewards, even with minimal effect sizes, could potentially have a signiﬁcant impact on clinical approaches and population health.”
– Clinical psychologist Christine Sheffer, et al.
Why it happens
Hyperbolic discounting is an occurrence of a larger phenomenon called “delay discounting.” According to the theory of delay discounting, as delays in receiving rewards increase, so does the value of those rewards. They are discounted in accordance with their delay. Hyperbolic discounting is slightly different, as it is not consistent across time. This means that people might be willing to wait longer for rewards they already expect to receive in the distant future, while assigning a significant discount to small delays in rewards they expected to receive in the near future.3
But why does this happen? Why does the value we place on rewards tend to decrease with time?
We like a sure thing
When making decisions, we tend to favor options that are certain. Decision makers are usually risk averse. This means that we are often willing to accept a small but certain reward over a larger gain that is less certain because there is a chance we won’t secure it.4 While long-term rewards are not always more risky (sometimes they are actually less risky), because there is a large window of opportunity for issues to arise, we feel more secure when the rewards are already in our hands.
Part of the reason for this, is that we have difficulty understanding long-term consequences. We are bad long-term planners, and therefore subject to what’s called “temporal myopia.” Because we can’t see and evaluate the future effectively, there is always some uncertainty. It makes sense that we have evolved to be this way: for our ancestors, the immediate challenge of survival took precedence over concerns or speculations of the distant future.5
Waiting is difficult
It is no secret that waiting for something you want is difficult. It sometimes takes a measure of self-control that many of us don’t have. Part of the reason why is that we have non-linear perception of time. This means that time seems to go by slower or faster depending on our situation and our expectations for the future. So, a small chunk of time might go by slowly for a reward we really want, or one that we expected to receive soon.6
Why it is important
As mentioned before, the impulsivity and search for immediate gratification that hyperbolic discounting encourages can be damaging in many aspects of our lives. It can also make us miss out on better opportunities that come to fruition in the long-term, as they often do.
Another clear reason why we should be aware of hyperbolic discounting, is that studies link it to procrastination. When we put-off or avoid a task, we are essentially prioritizing the immediate gratification of not undergoing an unpleasant experience over the future reward from completing the task. Most of us suffer from procrastination to some degree, and would benefit from mitigating it.7
How to avoid it
Research shows that there are various ways of reducing hyperbolic discounting. A 2016 study concluded that “future focus priming” was an effective way of reducing this cognitive bias. “Priming” is when someone is exposed to a stimulus (a word, for instance) that influences their response to a second stimulus. Christine Sheffer and her colleagues found that being exposed to words like “future,” “long-term” and “self-control,” actually made participants more likely to think of themselves and their future in this way.8
What does this mean for us? Thinking about and discussing your long-term future on a regular basis may “prime” you for making decisions that prioritize it. A second method, supported by research, is trying to imagine and interact with your future self.9 Picturing the “you” that might result from your short or long-term decisions might influence you to make decisions that favor the latter.
How it all started
While economists were the first to notice that people tend to discount the future, and developed what is known as the “discounted utility model” to describe it. The cognitive bias was termed “hyperbolic discounting” by psychologist Richard Herrnstein in 1961. He noticed that subjects in his studies tended to look at rewards in proportion not only their rates and amounts, but also in accordance with their immediacy.10
Example 1 - Stalled climate change action
Environmental degradation is a clear example of short-term thinking. By now it is clear that the long-term effects of carbon intensive activities and technologies will be enormously costly. An overwhelming consensus in the scientific community points to a causal link, and warns of resulting environmental disaster.
Yet, these products and sources of energy serve an immediate need at a low initial cost. Many of us are willing to continue using them and absorbing their externalities because we discount the future costs they will have. This may be due to hyperbolic discounting.
Example 2 - High school dropout rates
In their 1989 paper on the relationship between choices and time, American economists George Loewenstein and Richard H. Thaler use the example of highschool dropout rates to illustrate discounting.
They point to a change in West Virginia law, which stipulated that students under the age of 18 who choose to prematurely leave school also lose their driving licenses. A year after the law was implemented, high school dropout rates fell by one third. Loewenstein and Thaler believe this points to discounting, as it is unlikely that this many students were on the edge of dropping out and their rational calculus was tipped in favour of staying enrolled because of the inconvenience of losing their driving permits. It is more likely that students had previously discounted the long-term consequences of dropping out. But once the short-term consequence of losing their licenses was tied to enrolment, there was suddenly an immediate reward associated with staying in school— which they prioritized over the long-term rewards that were previously overlooked.11
What it is
Hyperbolic discounting is our inclination to choose immediate rewards over rewards that come later in the future, even when they are smaller.
Why it happens
Hyperbolic discounting is an occurrence of a larger phenomenon called “delay discounting,” but is distinct because it is not consistent across time. People might be willing to wait longer for rewards they already expect to receive in the distant future, but not for small delays in rewards they expected to receive in the near future.
This happens because decision makers are usually risk averse, and there is a perceived risk attached to long-term rewards because of their uncertainty compared to immediate ones. We can attribute this to “temporal myopia,” or our difficulty evaluating the future.
Another reason hyperbolic discounting occurs is that waiting is difficult because of our non-linear perception of time. This means that time seems to go by slower or faster depending on our situation and our expectations for the future.
Example 1 - Stalled climate change action
Environmental degradation is a clear example of short-term thinking. The enormous long-term costs of carbon intensive activities and technologies are now clear, but they do serve an immediate need at a low initial cost. Many of us are willing to continue using them and absorbing their externalities because we discount the future costs they will have. This may be due to hyperbolic discounting.
Example 2 - High school dropout rates
In a 1989 paper, high school dropout rates are used to illustrate discounting. A change in West Virginia law stipulated that students under the age of 18 who choose to prematurely leave school also lose their driving licenses. A year after the law was implemented, high school dropout rates fell by one third. It is unlikely that this many students were on the edge of dropping out and losing their drivers license tipped their rational calculus was tipped in favour of staying enrolled. It is more likely that being unable to drive legally simply had an effective deterrent effect. This means that students prioritized this relatively short-term reward in their decision to leave or remain in school.