Hyperbolic Discounting

We’ll accept smaller payoffs now over larger payoffs later on

Hyperbolic Discounting

We’ll accept smaller payoffs now over larger payoffs later on

If you were offered $50 now or $100 in a year, you’d likely take the $50 now. But what about $50 in five years or $100 in six years? We’ve only added a delay, but now it feels just as natural to wait for the $100.

Hardman (2009). Judgment and decision making: psychological perspectives. Wiley-Blackwell.

Given two similar rewards, we humans have a preference for one that arrives sooner rather than later. More interestingly, we tend to discount the value of the later reward by an amount that increases with the length of the delay.

Playing around with the notion of time a bit, a study (Madden, Ewan & Lagorio, 2007) showed that gamblers have even been found to perceive more value in rewards obtained following unpredictable delays than those obtained following predictable delays. This is very much in line with the thinking that we respond favourably to rewards at random intervals than those at pre-defined, and therefore expected intervals.

Takeaways for decision-makers

  1. Consider the value of immediacy / convenience into a product / service offering, over offering a marginally cheaper alternative at a significantly later point in time.
  2. Offer a premium service that prioritises delivery of that good or service over the expected norm. If it’s immediate enough, there will be demand for it.
  3. Be aware of the fact that there’s a exponential decay factor in our willingness to choose something now. As the main example above around £50 versus £100 shows, as time passes, our desire for relative immediacy diminishes substantially over time.

Further Reading

Delay Discounting and the Allure of Unpredictable Outcomes (Madden, Ewan & Lagorio, 2007)

Judgment and decision making: psychological perspectives Amazon (Hardman, 2009)

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