Hyperbolic Discounting
Hyperbolic Discounting is a concept from behavioral economics that describes how people tend to prefer smaller, immediate rewards over larger, delayed rewards, but their preferences change depending on the time frame.
According to this, people tend to favor instant rewards over delayed ones. The appeal of immediate benefits diminishes as the waiting time increases. This means that individuals significantly reduce the importance of a future reward when it seems far away but might be more patient when the reward is nearer in time.
Comprehending the impact of hyperbolic discounting on financial choices empowers individuals to adopt tactics that counter impulsive immediate decisions, fostering a closer harmony with long-term financial objectives and stability.
Example: Imagine someone is offered $100 today or $150 in a month. They might choose the $100 today because waiting a month for $150 feels like too long of a wait. However, if the choice is between $100 in a year or $150 in a year and a month, they might opt to wait the extra month for the larger reward because it's closer in time.
Areas it can help in: Financial planning, Credit card use, Investment choices, Asset allocation
