Hyperbolic Discounting: Definition, Examples and Effects

Hyperbolic discounting is a cognitive bias in which people tend to choose smaller, immediate rewards over larger, later rewards. The term "hyperbolic" is used to describe the shape of the curve when the decline in value or importance of a reward is plotted over time. As the delay to a reward increases, people tend to discount its value at an increasing rate.

Example: If you were given the choice between receiving $100 now or $110 a week from now, you might choose the immediate $100. But if given the choice between receiving $100 a year from now or $110 a year and one week from now, you would likely choose the $110. Even though the time delay and the difference in the amount is the same in both situations, the immediate reward is overly enticing.

Effects: This bias can have significant implications in areas such as personal finance and health. For example, people might choose the instant gratification of spending money now rather than the delayed benefits of saving for retirement. Or they might choose the immediate pleasure of eating unhealthy food rather than the delayed benefit of maintaining a healthy diet.

Do you want to expand your knowledge on this topic? Read our full in-depth article on cognitive biases.

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