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

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. Often, leaders pursuing immediate gratification—in the form of a quick economic boost and approval from the public—often underinvest in programs that would reduce economic and social costs in the long term. Environmental policies, preventive healthcare programs, and education are frequently underfunded because the benefits are not immediately visible, while the upfront costs can be large. Leaders also tend to prioritize highly visible infrastructure projects, like building a fancy new sports stadium, over less glamorous but essential maintenance on existing infrastructure, like making repairs to a rusty old water main or a crumbling public transit system. But as we know, deferring maintenance on public infrastructure can make repairs more costly in the future—or worse, lead to catastrophic failures that impact public safety.

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.

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 prefer certainty over risk

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), there is a large window of opportunity for issues to arise, so 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 for this is that we have a 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

As mentioned before, the impulsivity and search for immediate gratification that hyperbolic discounting encourages can be damaging in many aspects of our lives. We might make credit card purchases we can’t really afford or drink too much on Friday night, even when we know the hangover will ruin our Saturday. It can also make us miss out on better opportunities that come to fruition in the long term, as they often do. For instance, some people withdraw their retirement savings early to cover discretionary expenses, missing out on the additional money that would accrue with a few more years of compound interest.

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 of completing the task. Scrolling on social media feels more enjoyable than studying for an exam, but this means forgoing the reward of feeling confident and well-prepared going into your exam. Whether it’s at school, work, or at home, most of us suffer from procrastination to some degree and would benefit from mitigating it.⁷

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.

Commitment devices can also be valuable. For example, you might set up an automatic savings plan to funnel a portion of your paycheck into a separate account to prevent yourself from spending this money on short-term gratification. Or maybe you only stock your pantry with healthy snacks, so choosing the immediate reward of a sugary treat just isn’t an option. Try to think of other ways you could restrict your ability to make future impulsive decisions that would otherwise get in the way of your long-term goals. Even something as simple as making a promise to your partner or setting self-imposed deadlines can be helpful.¹⁵

Economists were the first to notice that people tend to discount the future, and developed what is known as the “discounted utility model” in the 1930s to describe this phenomenon.¹² This early economic model assumes that the value people place on a reward decreases on an exponential curve and follows a constant rate, meaning that we should make a consistent choice between the same two options over time.

For example, imagine you’re given the choice between receiving $100 today or $110 one month from now. If you would choose the $100 now, it’s worth more to you than $110 a month from now. The model assumes that you would then also choose $100 in 11 months over $110 in 12 months since the rate of increased value remains the same, and the value you place on the reward should decrease at the same rate. In reality, people’s behaviour is largely inconsistent with the theoretical predictions of the discounted utility model.

Later research by Richard Herrnstein in the 1960s revealed that people tend to look at rewards in proportion to their rates and amounts and in accordance with their immediacy.¹⁰ His “matching law” states that behavior occurs in proportion to the level of reinforcement received, with immediate rewards providing greater reinforcement than later rewards.¹³ As delays between behavior and reward increase, the value of these rewards decreases, and so does the relative frequency of the behavior.

Building on this research, George Ainslie found that people’s preferences can flip when both options are pushed into the future.¹⁰ For example, he found that people who chose $50 in one year over $100 in three years often did not choose $50 in four years over $100 in six years, even though it’s the same choice just seen at a greater distance. 

He explained that the discounted value of a reward over time follows a hyperbolic curve rather than an exponential curve—the value of a reward drops very quickly at first, but as the delay gets longer, the rate at which the value decreases actually slows down. This means that we value more immediate rewards over long-term rewards, but when both rewards are pushed further into the future, the differences in their perceived value diminish. This finding is crucial to hyperbolic discounting—we discount the present value of a future reward based on how long we have to wait to get it.

Companies take advantage of hyperbolic discounting in a number of ways. For example, they might offer an initial discount for a subscription service and then raise prices later or allow customers to delay their payment until a later date. Thanks to hyperbolic discounting, the money customers anticipate spending later is worth less to them than the amount they’re saving at the time of purchase. This is why many people choose to pay monthly fees for a subscription service rather than an upfront annual fee at a discounted rate, even if they intend to keep the service for a year.

Some products are even specifically designed around the idea of hyperbolic discounting. Consider Afterpay, the “buy now, pay later” service that allows shoppers to pay a small portion of the purchase price upfront and split the remainder into interest-free installments to be paid over the next several weeks. An Afterpay user is spending the same amount of money overall, but because of hyperbolic discounting, those deferred payments seem less valuable than the immediate savings. Even predatory loan products with high interest rates can be appealing because of the effect. The perceived value of having cash in hand today outweighs the cost of future interest payments, since these are psychologically discounted to seem less impactful than they are.

AI programs are increasingly used in virtual personal finance assistants to provide personalized recommendations to users. This seems to be a popular use case for AI—a recent poll found that 67% of Gen Zers and 62% of millennials reported using AI to help with their personal finance tasks.¹⁴ Perhaps these assistants could be programmed to pick up on patterns of hyperbolic discounting in users’ spending and saving behavior to help reduce impulsive decisions. For example, if a user often prioritizes short-term spending over their long-term savings goals, an AI financial assistant might recommend setting up automatic savings transfers or spending limits for discretionary expenses. These personalized interventions could be very valuable to someone who struggles to choose between long-term rewards over short-term impulses.

AI systems could also present choices in a way that reduces the hyperbolic discount we place on long-term rewards. Instead of simply encouraging users to save $100, it might say, “Invest $100 today, and you’ll have $2,000 when you retire.” This makes it clear to the user that $100 saved for retirement is not just $100 deferred for the next several decades but an investment that will provide much higher future value—thanks to the power of compound interest. AI tools could personalize this advice with concrete numbers based on an individual user’s age, investment portfolio performance, and future goals to help them visualize the long-term benefits of immediate sacrifices.

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.

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.

How to Run Scenario Planning Drills: A Cybersecurity Risk Management Solution

Cybersecurity issues are on the rise, especially among companies with remote workers, and cybersecurity preparedness is becoming increasingly paramount. But many organizations fail to take adequate steps to prepare: a short-sightedness that increases the average cost of a breach by $3.58 million USD. This article explores how hyperbolic discounting plays a role in poor cybersecurity preparation and proposes a countermeasure solution called scenario planning.

TDL Perspectives: Addressing The Climate Crisis

Tackling climate change is a particularly challenging problem because it involves convincing people to make sacrifices now for future rewards. Think carbon taxes or fees for single-use bags. People tend to prefer short-term financial gains or conveniences over the long-term benefits of climate interventions. Check out this interview with  Jayden Rae, a senior consultant at TDL with expertise in environmental policy, for insights on how we might overcome these barriers using behavioral science.