Hyperbolic discounting

Written by Guido Jansen in
November 2010

Theory:

We discount the value of the later reward, by a factor that increases with the length of the delay. In other words: We prefer a small reward now over a large reward later on.

Application:

Rewards later, are worth less then rewards right now. People rather have €50 right now then €60 in a month. But that is inconsistent if you change the timeframe: people prefer having €60 in 13 months, rather then €50 in twelve months, although the wait for the extra €10 is still one month. When you give discounts in your shop you need to take notice of this, or you can even play with it. If you have a points system in your shop you can offer small discounts right now and big discounts in the future, but people are most likely to go for the small discount, unless the reward for waiting is REALLY big. Dan Gilbert explains this phenomenon in his TED Talk 'Exploring the frontiers of happiness' (video). He starts talking about Hyperbolic discounting at 18:13, but I recommend you see the whole video as it is a great presentation. Further reading: Hyperbolic discounting on Wikipedia.

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