Hyperbolic Discounting

“We show a preference for rewards that arrive sooner rather than later”

When we consider a choice between two rewards, we tend to prefer the readily available one. We have a stronger preference for more immediate payoffs relative to later payoffs. In other words: the current is incredibly more powerful than the future. Imagine we can choose between one candy bar right now, or two in a month time. We might prefer the readily available candy bar (instead of waiting a month for an extra bar). However, if we have to wait 12 months to get one candy bar, and 13 months to get two bars, we switch our preference and do tend to prefer waiting the extra month.

This effect is explained by hyperbolic discounting models: The longer we have to wait the more we discount the value of rewards, and this discounting is initially strong, but then levels off.

Because of this hyperbolic discounting effect, we can switch our preference for ‘waiting for an extra reward’, depending on how far in the future the waiting starts. Since the further in the future, the more equal the ‘discount factor’ will be (for the perceived costs of waiting).

There are 2 types of hyperbolic discounting models: ‘sophisticated’ and ‘naive’. When we’re ‘sophisticated’, we realize that we have hyperbolic preferences and will probably take steps to deal with it. However when we’re ‘naive’, we will not try to counteract the hyperbolic discounting effect.

Scientific Research Example:

So behavioral scientists have proven that our preferences are dependent on when we get our reward. More recently neuroscientists studied this bias in order to find out whether different parts of our brain are involved in immediate or delayed a reward decisions. And that is exactly what they found.

McClure et. al (2004) found that decisions involving immediate available rewards, preferentially activate parts of the limbic system associated with the midbrain dopamine system, including paralimbic cortex. These brain parts are typically involved in ‘system 1’ processes; automatic, instinctive, old evolutionary adaptations to our environment.

Different activation of the (para-)limbic system, depending on reward immediacy

Intertemporal choices however, uniformly engage regions of the lateral prefrontal cortex and posterior parietal cortex. These parts of our brain are responsible for – so called – system 2 processes; the uniquely human capacity for abstract, logical, domain-general reasoning and future planning.

Online Persuasion tips:

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Make your solutions directly available (or at least as quickly as possible).
Push products you prefer to sell by making them more quickly available.
Experiment with up selling by making the cheaper alternative less readily available (extend the delivery time of the down-sell item).

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Hyperbolic Discounting