Hyperbolic discounting
Hyperbolic discounting is a cognitive bias where individuals tend to prefer smaller, immediate rewards over larger, delayed rewards. This bias reflects the human tendency to reduce the perceived value of delayed outcomes, often leading to choices that contradict long-term interests.
How it works
The hyperbolic discounting model suggests that the perceived value of a reward decreases non-linearly with the delay to its receipt. Unlike exponential discounting, which assumes a constant rate of discounting over time, hyperbolic discounting implies that the discount rate decreases as the delay increases. This is why immediate rewards are heavily favored even if the delayed rewards are objectively more valuable.
Examples
- Choosing to spend money on a luxury purchase now rather than saving for future financial security.
- Opting to eat a dessert immediately rather than maintain a diet that would result in health benefits later.
- Preferring to binge-watch a TV series instead of working on a long-term project with substantial future rewards.
Consequences
The tendency to favor immediate gratification over future benefits can lead to various negative outcomes, including poor financial planning, unhealthy lifestyle choices, and procrastination. These decisions often result in regret as the delayed benefits are not realized.
Counteracting
To counteract hyperbolic discounting, individuals can employ strategies such as setting clear long-term goals, using commitment devices, creating temporal benchmarks, and breaking tasks into smaller, manageable steps with intermediate rewards.
Critiques
Some critiques of hyperbolic discounting challenge its universality and suggest that it oversimplifies human decision-making. Critics argue that individual differences, context, and environmental factors also play significant roles in how people evaluate delayed rewards.
Fields of Impact
Also known as
Relevant Research
A Theory of Hyperbolic Discounting and Its Effects on Intertemporal Choice
David Laibson (1997)
Journal of Economic Perspectives
Stronger effects of cognitive enhancers when deprivation is high: forces underlying hyperbolic discounting
Maciej Wilk and John Pierce (2004)
Psychological Review
The behavioral life-cycle theory of consumer behavior: A model of consumer frugality, deferred gratification, and discretionary spending
Shlomo Benartzi and Richard Thaler (1995)
Advances in Consumer Research
Recommended Books
Case Studies
Real-world examples showing how Hyperbolic discounting manifests in practice
Context
A mid-stage SaaS company was scaling its commercial team to hit aggressive quarterly revenue targets while preparing to raise a new funding round. Leadership emphasized immediate bookings to demonstrate growth metrics to investors, creating pressure on sales reps to close deals quickly.
Situation
The sales compensation plan paid large commissions on deals closed within the quarter but offered little reward for multi-quarter account development or upsells. Several account executives prioritized small, fast deals that converted immediately instead of investing time in longer negotiations with enterprise prospects that promised higher lifetime value.
The Bias in Action
Individual reps displayed hyperbolic discounting by disproportionately valuing the immediate commission over the delayed, larger rewards from enterprise accounts. Managers observed that pipeline notes showed brief outreach, no deep discovery, and repeated attempts to steer prospects toward pared-down packages that could close quickly. Even when enterprise deals were recognized as higher value in CRM forecasts, reps bypassed the longer sales cycles because the nearer reward (quarterly commissions and quota attainment) felt subjectively more valuable. Over several months the company culture normalized chasing short-term closures, reinforcing the bias through team recognition and leaderboard incentives.
Outcome
In the short term the company met quarterly booking targets, and many reps exceeded quota, earning handsome commissions. Over the next 12–18 months churn rose among the rapid-win customers, average contract value underperformed projections, and several large enterprise opportunities were lost to competitors who had nurtured those accounts. The company missed its projected ARR milestone for the Series B, forcing a down round and restructured hiring plans.