Put Hyperbolic Discounting to Work
- Raise Your Price. Wait For The Reward.
- Buy Now. Pay Later.
- Give an Immediate Gift.
- Charge a Higher pPrice for a Shorter Term.
- Pay For Referrals Right Away.
- Offer Mail-in Rebates.
Why is hyperbolic discounting used?
More generally, the rate at which people discount future rewards declines as the length of the delay increases. This phenomenon has been termed hyperbolic discounting by the psychologist Richard Herrnstein. Thus, the amount a future reward is discounted depends on the length of the delay and when the delay occurs.
What is hyperbolic discounting in marketing?
Hyperbolic discounting is a psychological bias where people to prioritize immediate rewards and satisfaction over future rewards. It’s used in sales and marketing to encourage consumers to purchase based on the short-term reward, or instant gratification.
What are the effect of hyperbolic?
Individual effects Hyperbolic discounting can result in poor decision-making, because it incentivizes impulsivity and immediate gratification. Decisions that prioritize short-term gratification often neglect and detract from our long-term well-being.
What is hyperbolic discounting in finance?
“Hyperbolic discounting is a cognitive bias, where people choose smaller, immediate rewards rather than larger later rewards and this occurs more when the delay is closer to the present than the future.” Hyperbolic discounting is usually studied by asking people if they would rather get $50 now or $100 next year.
How are hyperbolic discounters different from exponential discounters?
The discount rate is constant. Whereas an exponential curve has a constant discount rate, a hyperbolic discount curve has a higher discount rate in the near future and lower discount rate in the distant future.
How do you use hyperbolic discounting?
The power of hyperbolic discounting adjusts based on the time involved. If you have to wait to receive both rewards you become more likely to want the reward with the greatest benefit. For example, if you had to choose between $50 now or $100 in 6 months, you’re most likely going to take the $50 today.
How do you overcome hyperbolic discounting?
How to Manage Hyperbolic Discounting
- #1: LEARN: Build awareness of the concept. The first key to overcoming a cognitive bias is understanding it.
- #2: SUBTRACT: Automate your choices.
- #3: REWARD: Create short-term incentives.
- #4: COMMIT: Use other commitment devices.
What is present biased?
From Wikipedia, the free encyclopedia. Present bias is the tendency to rather settle for a smaller present reward than to wait for a larger future reward, in a trade-off situation. It describes the trend of overvaluing immediate rewards, while putting less worth in long-term consequences.
What is delay discounting in psychology?
Abstract. Delay discounting is the decline in the present value of a reward with delay to its receipt. Across a variety of species, populations, and reward types, value declines hyperbolically with delay. Value declines steeply with shorter delays, but more shallowly with longer delays.
What are the benefits of hyperbolic?
The hyperbolic hard-gainer stack provides a wide array of other power enhancing amino acids, ß-alanine, HMB, natural testosterone optimisers, as well as different creatine forms with absorption boosters. Hyperbolic mass has been scientiﬁcally designed to help you achieve very high levels of muscle mass and stamina.
What are the benefits of mass gainer?
Mass Gainer Benefits
- Rich In Carbohydrates. Mass Gainers contain a rich amount of carbohydrates.
- Contains High-Quality Whey Protein. Mass Gainers contain high quality of Whey Protein, which is an amazing supplement for bodybuilding.
- Aids In Muscle Recovery & Growth.
- Blend Of Minerals & Vitamins.
- Rich In Fiber.
What is the best time to drink mass gainer?
Time It Right Some people advocate getting your extra calories in before you hit the gym to fuel your workout. Some say that a mass gainer is best chugged right after a workout for a recovery drink with lots of protein. Others recommend drinking it right before bed or as soon as you wake up.
Is present bias the same as hyperbolic discounting?
What is Hyperbolic Discounting? Hyperbolic discounting, also called “present bias,” is a cognitive bias, where people choose smaller, immediate rewards rather than larger, later rewards. The discounted present value of the future reward follows a mathematical curve called a “hyperbola.”
Why does a hyperbolic discounter have time inconsistent preferences?
This dynamic inconsistency happens because hyperbolas distort the relative value of options with a fixed difference in delays in proportion to how far the choice-maker is from those options.
What is the discount factor in finance?
Discount Factor is a weighing factor that is most commonly used to find the present value of future cash flows and is calculated by adding the discount rate to one which is then raised to the negative power of a number of periods.
Hyperbolic Discounting: How to Use This Psychological Bias to Sell More
On Monday morning, I woke up. In in need of caffeine, I’m feeling foggy and tired. Choosing between making coffee at home or going out to get coffee has become the first decision of the day. While I’m debating between my two possibilities, my phone vibrates with a notification – it’s from Starbucks. I ignore it. There is just a limited amount of time! When you purchase a beverage, you will receive a complimentary pastry. Oh my goodness! This is the point at which the justification process begins.
An deal like that is simply too good to refuse.
Currently, there isn’t enough for a free cup of coffee, but I only require a couple more.
If I purchase today, not only will I be able to enjoy coffee and breakfast, but I will also be awarded with points that may be used toward a free beverage in the future.
So, what is hyperbolic discounting and how does it work?
Hyperbolic discounting is a psychological bias that causes people to place a higher value on present benefits and happiness than on future rewards and contentment. It is used in sales and marketing to entice customers to make a purchase based on the promise of a short-term benefit, also known as immediate gratification. It is described as “the tendency to make judgments or conduct actions in an irrational manner” when it comes to psychological prejudice or cognitive bias. Because of psychological bias, people are more inclined to pick a short-term reward even if a benefit in the future is greater or more value than a reward now.
Hyperbolic Discounting Example
Free delivery offers are a fantastic illustration of hyperbolic discounting in action. “If you spend more than $50, you’ll receive free delivery.” If the customer only has $35 in their basket, they are obligated to continue shopping in order to complete the transaction. Overall, cognitive bias promotes instant rewards (such as free delivery on a larger purchase) over being patient and waiting for a greater benefit later on in life (having more money in your bank account and making another purchase when budget allows).
- This is what Everlane is renowned for: Exceptional quality in their apparel.
- Transparency on an unprecedented scale.
- It offers an e-commerce sales mechanism known as Afterpay, which allows customers to purchase now and pay later.
- Source:Milled Purchasing a new wardrobe is an expensive endeavor, and Afterpay allows buyers to postpone the financial strain associated with the purchase.
Everlane gains from this since the consumer ends up spending more money than they had initially planned to spend. As a result of giving several opportunities for lesser discounts, the effect of this compoundes over time and has a beneficial influence on revenue.
Hyperbolic Discounting in Marketing and Sales
Here are a few examples of how you might utilize hyperbolic discounting to your advantage when selling goods or services.
1. Loyalty Programs and Point Systems
What is the operation of loyalty programs and point systems? They are customer loyalty programs that businesses give to clients who make repeated transactions with them. Customers that participate in loyalty programs receive free stuff, awards, discounts, and even early access to new products. Your consumers will be more likely to purchase from you if they receive these incentives. Smaller, more immediate incentives also play into customers’ psychological biases, providing them with the rapid satisfaction they want.
Customers would be more inclined to suggest a business that has an effective loyalty program, according to a recent survey.
2. Limited Time Offers
Would you be motivated to click on this if you received it in your inbox? Limited-time deals instill a feeling of urgency in the minds of customers. It causes individuals to pause and reflect “Unless I act quickly, the price will never again be this low. I’ll have squandered a fantastic chance.” They will frequently purchase the goods on the spot, opting for the short-term gain above the long-term gain. Examples of limited-time deals include the following:
- Is back for a short time only
- This is your last opportunity! Save $25 on a limited-time offer! X percent discount
- There are just a few hours left to save money on
3. Delay Payment
Do you have a credit card in your possession? If this is the case, you’re probably familiar with the concept of deferring payments. It’s quite easy to fall into the “buy now, pay later” mentality when shopping online. Moreover, it simply takes a single swipe of your credit card to experience the immediate joy that comes with acquiring a thing that you desire. In addition, numerous businesses, such as J. Crew, Kohl’s, and Amazon, offer credit card programs. Customers can purchase a product and make incremental payments toward the purchase price, which is a straightforward method of implementing a “wait payment” option.
Because of the practically instantaneous enjoyment they receive from purchasing the goods, the financial expense they will incur in the future is outweighed by the satisfaction they receive now.
Note from the editor: This piece was initially published in May 2019 and has been revised to ensure it is as complete as possible.
Hyperbolic discounting – Biases & Heuristics
When and when does this prejudice manifest itself?
Individual ramifications Effects on the system as a whole What causes it to happen What is the significance of it What you can do to avoid it The beginning of it all Example 1: Climate change activity has come to a halt. Example 2 – The percentage of high school students who leave out Summary
What is Hyperbolic Discounting?
Hyperbolic discounting refers to our tendency to choose immediate benefits over those that will be received later in the future, even though the immediate rewards are less significant.
Where this bias occurs
Let us consider the following hypothetical situation: Every week, John goes out and buys a lottery ticket. He aspires to be a huge winner one day. He is lucky enough to do this on one occasion, against all odds. John’s net worth has increased to little more than $5 million. After a flurry of embraces and festivities, John traveled to the lottery headquarters to receive his reward, where he was greeted with more hugs. When he arrived, the lottery director presented him with a choice: he could either collect the $5 million immediately, or he could chose to receive $250,000 per year for the rest of his life in lieu of the cash prize.
A quick mental calculation revealed that the second choice would provide more cash for John if he lived past the age of 55, which was something he intended to do.
John chose to go with the first choice, despite the fact that he would receive less money in the long term.
Because it encourages impulsivity and quick pleasure, hyperbolic discounting can lead to poor decision-making in a variety of situations. 1 When we make decisions that favor short-term satisfaction above long-term well-being, we frequently overlook and undermine our long-term well-being. Consider smoking: it provides a brief surge of dopamine that is more important than one’s long-term health. While addiction frequently plays a part in people’s decision to smoke, nicotine addiction itself has been related to a reduction in the importance placed on delayed or long-term consequences (ie.
2 The quick loss of subjective value for delayed consequences is characteristic of cigarette smoking, as well as other kinds of drug dependency, particularly for the substance of dependence.– Warren K.
In the case of having money to spare, it can be a good idea to put part of it aside to put towards one’s future retirement.
Since a result, they may have made a mistake, as they would have gained far more from allowing this money to compound interest for their future retirement.
Short-term thinking has the potential to have negative consequences for a wide range of institutions and professions. Government administrations that place a high priority on political gain during their tenure in office may end up jeopardizing the public’s well-being for many years to come. The same may be said about a firm that is just concerned with quarterly earnings and is unwilling to make costly changes to its production or management structure that are essential for their long-term success.
Finance is an excellent example, since investors must weigh the benefits of high short-term returns, which are frequently associated with high risk, against the benefits of long-term investments, which are typically associated with lower risk and higher yields.
Christine Sheffer, a clinical psychologist, and colleagues
Why it happens
Delay discounting is a bigger phenomena that includes hyperbolic discounting, which is an instance of it. According to the notion of delay discounting, as the amount of time it takes to get incentives increases, the value of those benefits decreases. They are depreciated in proportion to the amount of time that has passed since they were received. Hyperbolic discounting, on the other hand, is a little different since it is not constant through time. The implications of these findings are that individuals may be prepared to wait longer for prizes that they already anticipate receiving in the far future, while at the same time giving a big discount to minor delays for rewards that they anticipate receiving in the very near future.
The reason for this is that the value we place on rewards tends to diminish with time.
We like a sure thing
When making decisions, we have a tendency to choose solutions that are known to be correct. The majority of decision makers are risk averse. In other words, we are frequently prepared to accept a little but guaranteed reward in exchange for a greater gain that is less certain since there is a possibility that we will not be able to obtain it. 4 While long-term rewards are not always more risky (in fact, they are sometimes less risky), we feel more secure when the rewards are already in our possession.
The fact that we have difficulty understanding long-term consequences is one of the factors contributing to this.
It makes sense that we have evolved to be this way: for our forefathers, the immediate struggle of survival took precedence over concerns or speculations about the distant future, which made us what we are today.
Waiting is difficult
The fact that it is tough to wait for something you desire is not a secret. It is occasionally necessary to exercise self-control, which is something that many of us lack. One of the reasons behind this is that humans have a non-linear view of the passage of time. This means that time appears to pass more slowly or more quickly based on our current circumstances and our hopes for the future. In order to acquire a reward that we truly desire or that we anticipate to receive soon, a tiny amount of time may pass slowly.
Why it is important
As previously stated, the impulsiveness and need for rapid pleasure that hyperbolic discounting fosters may be detrimental in a variety of facets of our life, including our relationships. We can lose out on greater possibilities that come along in the long run, as is frequently the case with these kinds of things. The fact that studies have linked hyperbolic discounting to procrastination is just another compelling reason for us to be aware of it. When we put off or postpone a task, we are effectively valuing the present satisfaction of not having to go through an unpleasant experience over the future benefit that would come from successfully completing the work.
Procrastination affects nearly everyone at some point in their lives, and many of us would benefit from learning how to manage it better. 7
How to avoid it
According to the findings of the research, there are a variety of approaches to minimizing hyperbolic discounting. According to the findings of a 2016 study, “future attention priming” was an effective method of minimizing this cognitive bias. When someone is exposed to a stimulus (for example, a word) that alters their response to a second stimulus, this is known as “priming.” The researchers discovered that being exposed to phrases such as “future,” “long-term,” and “self-control” really increased participants’ likelihood to conceive about themselves and their future in this manner.
The act of regularly considering and discussing your long-term future may “prepare” you for making decisions that place it at the top of the priority list.
9 Making mental pictures of the “you” that could emerge as a result of your short- or long-term actions may encourage you to make decisions that are more favorable to the latter.
How it all started
Various methods of decreasing hyperbolic discounting have been discovered by researchers. According to the findings of a 2016 research, “future attention priming” was an effective strategy for minimizing this cognitive bias. Priming occurs when a person is exposed to a stimulus (for example, a word) that has an impact on their response to a subsequent stimuli. As Christine Sheffer and her colleagues discovered, being exposed to phrases such as “future,” “long-term,” and “self-control” really increased participants’ likelihood to think about themselves and their future in this manner.
It is possible that thinking about and discussing your long-term future on a frequent basis can “prime” you for making decisions that put it first.
9 Imagining the “you” that may emerge as a result of your short- or long-term actions may encourage you to make decisions that are more in favor of the long-term perspective.
Example 1 – Stalled climate change action
The destruction of the environment is a textbook example of short-term thinking. At this point, it should be evident that the long-term consequences of carbon-intensive activities and technology will be extremely expensive. The scientific community has reached an overwhelming consensus on the existence of a causal relationship and the impending environmental catastrophe that will occur. But these products and energy sources meet an immediate demand at a cheap initial cost, making them a good investment.
It is possible that this is due to hyperbolic discounting.
Example 2 – High school dropout rates
The example of high school dropout rates is used by American economists George Loewenstein and Richard H. Thaler in their 1989 work on the link between decisions and time to demonstrate the concept of discounting in economics. They refer to a modification in West Virginia legislation that mandated that children under the age of 18 who choose to leave school early would also forfeit their driving privileges. High school dropout rates decreased by one-third in the first year following the implementation of the law.
It is more likely that students have previously underestimated the long-term ramifications of dropping out of college.
The short-term consequence of losing their licenses was related to enrollment, however, and they realized that there was an immediate incentive associated with staying in school—which they valued over the long-term benefits that had previously been neglected. 11
Hyperbolic discounting refers to our tendency to choose immediate benefits over those that will be received later in the future, even if the immediate rewards are lower.
Why it happens
Hyperbolic discounting is a manifestation of a wider phenomena known as “delay discounting,” but it is distinguished from it by the fact that it is not constant across time. It is possible that people may be willing to wait longer for prizes that they already anticipate to obtain in the far future, but they will not be willing to wait longer for rewards that they expect to receive in the near future. This occurs because decision makers are often risk adverse, and there is a perceived risk associated with long-term gains due to their uncertainty when contrasted to immediate returns.
Another explanation for hyperbolic discounting is that waiting is difficult due to our non-linear sense of time, which makes it difficult to remain patient.
Example 1 – Stalled climate change action
The destruction of the environment is a textbook example of short-term thinking. Even though the tremendous long-term costs of carbon-intensive activities and technology are now well understood, they do fill a critical immediate demand at a very cheap initial cost. The fact that many of us are ready to continue using them and enduring their externalities is due to our discounting of the future costs they will have on society. It is possible that this is due to hyperbolic discounting.
Example 2 – High school dropout rates
Dropout rates from high school are given as an example of discounting in a report published in 1989. Students under the age of 18 who choose to leave school early will have their driving privileges revoked, according to a provision in West Virginia law. High school dropout rates decreased by one-third in the first year following the implementation of the law. That this large a number of students were on the verge of dropping out and losing their driver’s license skewed their reasonable calculus in the direction of remaining enrolled seems improbable.
This is more likely to have been the case.
A behavioral bias known as hyperbolic discounting reflects the propensity for people to gradually prefer a smaller-earlier reward over a larger-later benefit when the delay occurs sooner rather than later in time. Full disclosure: I am just as guilty as everyone else (if not more so) of this offense. Exhibit A is my book consumption, which is as follows: I’ve never read as many novels as I have since being able to download them with a single click, and, to be really honest, I never compare the price of the Kindle edition to the price of the paperback version that comes with free delivery (within one to three days).
- While my discount rate from zero to one is unquantifiably enormous, the discount rate between one and three is a finite and sensible figure.
- To put it another way, people become increasingly averse to waiting as the time for the wait draws closer to the present.
- People, on the whole, prefer to receive their benefits sooner rather than later.
- Classical economics posits that people discount a future benefit by a predetermined percentage for each unit of time that they must wait before they can take advantage of the opportunity.
- A person should also enjoy $100 in a year and $110 in two years at the same rate, according to the same individual.
- Despite the fact that exponential discounting has been frequently employed in economics, a substantial body of research demonstrates that it does not explain people’s decisions in any way.
- Using the above example, many individuals would choose $100 now over $110 in a day, but only a small number would prefer $100 in 30 days over $110 in 31 days.
If they are forced to wait right now, they would choose the polar opposite.
Psychotherapist Richard Herrnstein has coined the term “hyperbolic discounting” to describe this phenomenon.
There are a variety of reasons why people prefer the safe bet; their preferences may change; or they may be faced with a pressing need, such as hunger or the need to pay the rent.
When faced with a choice between $100 or $110 a day later, as in the previous example, people believe that in a month they will be willing to wait a day for an additional $10 in value.
For the record, even when confronted with the same exact choice, people act impulsively in the short term while displaying greater patience in the long term.
If we take the classical economic view of exponential discounting, a future reward will be reduced by a factor of fracwhere ki is the constant discount rate per time unit and t is the length of the delay Given a constant discount rate, the amount by which a future reward is discounted is solely dependent on the length of time that has passed.
- Due to the fact that this formula is the generalized function for a hyperbola, the term “hyperbolic” is employed.
- As a result, the amount by which a future reward is discounted is dependent on the length of the delay as well as the time at which the delay occurs.
- Two other, more straightforward versions of hyperbolic discounting have been proposed and are widely used.
- As a result of using this formula, future rewards are discounted by the factor frac.
- In this case, future rewards are discounted by a factor of beta kt for any time t0 where beta is a positive integer.
- In addition, they discount by an exponential factor that grows at a constant rate with the length of the delay, as shown in the chart below.
- Even though, as previously stated, I am a victim of hyperbolic discounting in my personal life, I have been able to successfully disassociate myself from the impulse in my professional life.
The best illustration of this is found in negotiations.
However, I have had the opportunity on a few occasions to take advantage of the other side’s hyperbolic discounting to my own advantage.
We don’t need a Ph.D.
However, the hyperbolic discounting concept empowers a negotiator with the insight that a trivial concession leading to a handshake today has utility to the other side orders of magnitude larger than one left for tomorrow or another future date.
As long as the client is creditworthy, the lure of “enjoy now – pay later” works for both parties: my company gets the business at a premium rate that includes an implied interest rate while the client gets their solution immediately.
Instead, the hyperbolic power of the availability dominates their thinking – “Wow!
When an agent’s preferences are time-inconsistent, their preference ordering changes over time.
In fact, this can be assimilated to the psychological equivalent to a term structure of interest rates which, in the absence of tradable derivatives, can be arbitraged over and over again.
In fact, neuroscience researchers empirically proved that the durations of saccades of varying amplitudes can be accurately predicted by a model in which motor commands maximize expected maximizing reward.
In addition, and perhaps more crucially, I added this knowledge to my “reason toolbox,” which I may then use as yet another data point in the logical decision-making process.
Taking Advantage of Hyperbolic Discounting
When Warren Buffett’s investment partner, Charlie Munger, finished reading psychologist Robert Cialdini’s book Influence, he stated that it “filled in a lot of holes in my primitive approach.” So while Munger may have instinctively known the laws of influence, Cialdini’s book served as a model for his understanding. Munger and Buffett reportedly earned so much money off Cialdini’s book that they decided to give him a Berkshire Hathaway Class A share, which is presently worth more than $300,000, to thank him.
- Alternatively, they appear to have come from writing them.
- They sell first and ask questions afterwards, as is their policy.
- Furthermore, because we experience losses more intensely than we experience similar profits, selling provides pain alleviation.
- That is, if you are able to maintain your composure.
- That’s a five-dollar term.
- “As we approach a short-term temptation, our inclination to devalue the future follows the sharp curve of a hyperbola,” says Roy Baumeister in Willpower: Rediscovering the Greatest Human Strength.
- The cash flow is represented by the letter “reward,” the discount rate is represented by the letter “r,” and the period is represented by the letter “t.” The present value of $100 received in three years’ time at an 8% discount rate, for example, is $79 when discounted at a rate of 8%.
- An image of what it would look like, with the letter “t” magnifying the denominator now added.
- / In the prior example, the present value was $79, but it is now $23, which is a significant decrease.
- Implementing it in real life Let’s pretend we’re evaluating the current value of an asset with annual cash flows of $100 that will last for a period of ten years.
The rational actor would assume that the asset has a fair value of $671 based on the exponential discounting method. The irrational actor, on the other hand, would think that the fair value is less than half of that amount, or $271, based on hyperbolic discounting theory.
The cash flows are depicted in the following graph. When the market is in a panic condition, as seen in the table above, solid enterprises can be significantly undervalued by the marketplace. With no change in the long-term cash flow forecast or the overall riskiness of the firm, hyperbolic discounting by market players will be sufficient to push its share price lower on its own. In The Intelligent Investor, Benjamin Graham famously defined Mr. Market as “often.Mr. Market lets his excitement or anxieties run away with him, and the value he recommends appears to you to be a little short of ridiculous.” Long-term investors should take advantage of this situation.
Perhaps your own cash flow estimates are completely erroneous, or perhaps you have grossly miscalculated the risk associated with your organization.
Capitalizing To give an example, during the fourth quarter of 2018, we increased our holdings in Broadridge Financial Solutions (NASDAQ: BRLD), a provider of investor communications, trade processing, and wealth management technology, despite the fact that the stock had fallen nearly 30% from its September highs.
- Even though we are on the verge of entering a recession, the majority of Broadridge’s income is recurring, and the company’s services remain mission-critical to its clients.
- Despite the fact that we accept that our cash flow estimates will be off by a small margin, we believe Broadridge is one of the more innately forecastable firms that we own.
- Perhaps the most likely explanation is that hyperbolic discounting took hold with Broadridge.
- The passage of time will determine whether or not our judgement was right.
Market in The Intelligent Investor, Graham went on to say: “In general, price swings have just one meaningful implication for the actual investor.” These opportunities give him with the ability to purchase intelligently when prices fall precipitously and to sell smartly when prices rise significantly.” At the end of the day, this is what we’re aiming towards at Ensemble.
- Having stated that, we want to be prepared to purchase and sell stocks when market participants underprice or overprice equities due to emotional causes, respectively.
- Clients who have invested in Ensemble Capital Management’s core equity strategy now possess shares in Broadridge Financial Solutions, as of the date of this article (BR).
- Individual clients may have holdings that are not consistent with Ensemble Capital’s fundamental equity strategy as a consequence of client-specific circumstances.
- Please see the following link for further information on holdings held by Ensemble Capital on behalf of clients, as well as supplementary disclosure information relevant to this post: CLICK HERE.
- Past success does not imply a guarantee of future outcomes.
- The opinions stated in this blog post are current as of the date of publication and are offered only for the purpose of providing information.
- It is possible that all opinions will change without notice and that some of them will not come to pass as a result of changes in the market or economic environment.
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If you require extra disclosure information, please see the link provided above.
Exploit the Desire for Instant Gratification to Increase Conversion
When I was mulling around ideas for a post, I came across the topic of hyperbolic discounting and decided to write about it. True to my collaborative nature, I shared the title with an industry professional, and the following is what he had to say when I asked him about it: What exactly is Hyerp? What the $*R is going on? It’s fantastic. As a result, the following are the reasons why I picked the subject of hyperbolic discounting:
- A large number of people are completely unaware of what hyperbolic discounting is. Unsurprisingly, a lot of individuals aren’t aware of the enormous repercussions that hyperbolic discounting has on society as a whole. Many people do not take use of the potential of hyperbolic discounting when it comes to conversion optimization.
“WTF?” or a puzzled expression are common responses to the phrase hyperbolic discounting. Nonetheless, it is one of those notions that has the potential to take your conversion optimization to a whole new level.
What Is Hyperbolic Discounting?
As awful gibberish as the word “hyperbolic discounting” is, allow me to explain it in terms that even I can comprehend. Individuals engage in hyperbolic discounting when they would prefer to obtain $5 right now rather than $10 in a month. That’s all there is to it. People place a larger value on the immediacy of time than they do on the higher worth of money. the image’s source Another way to put it is that hyperbolic discounting is the desire for an immediate reward rather than a higher-valued, delayed payoff.
- “Shoot, those folks are stupid,” you’re probably thinking to yourself.
- “What does it matter if I have to wait?” But here’s the thing: here’s the thing: Hyperbolic discounting is classified as an acognitive bias, which means that it is a deeply entrenched mental glitch that defies logic and reason.
- The strength of the mental obstacle changes in relation to the amount of time spent on it.
- Although the real worth of the additional $50 does not change as the delay gap increases, the significance of the additional $50 swiftly fades for the majority of individuals.
- The great majority of people, statistically speaking, will accept the $50.
- For example, most people would prefer to get $100 in ten years rather than $50 in nine years.
- Instead of displaying the impact of exponential discounting, the effect of hyperbolic discounting is displayed via a hyperbolic curve.
This is an example of an exponential curve: the image’s source This is an example of a hyperbolic curve: the image’s source In a hyperbolic sense, the discount factor decreases in proportion to the length of time that has passed. the image’s source
Hyperbolic Discounting Truly Works
Hyperbolic discounting is not a fanciful trick that works sometimes and doesn’t work other times, as some people believe. Due to the way our neurological cognitive selves are constructed, we are susceptible to the pull of hyperbolic discounting even when we are not aware of it. We can defeat it by the use of logic. While the biology behind the bias is fascinating, it is clear that we cannot entirely dismiss hyperbolic discounting as a phenomenon. Its veracity has been repeatedly proven by a large number of scientific investigations.
- In other words, the brain is equipped with a built-in mechanism that increases the demand for immediate fulfillment.
- To put it another way, the brain produces discounting decisions on a reflexive and automatic basis, as explained above.
- One may only identify cognitive biases and eliminate them by doing an impartial analysis of the circumstance utilizing coherent reasoning power and coherent reasoning capacity.
- If your loincloth-clad hunter-gatherer forefathers and foremothers came across food, they would kill it and consume it immediately away.
- They’d be getting the scrawny one right now.
- By then, the tough hunter-gatherer would have passed away.
- They can see a little glass of water ahead of them.
- What exactly do they do?!
The Power of Now
This is a phenomena that copywriters, psychologists, and mothers are all too familiar with. We want what we want, and we want it immediately. We are impatient. Stanford psychologists conducted the classic marshmallow experiment in which they brought a youngster into a room and fed the child a single marshmallow. The treat was right in front of them, on a table, waiting to be discovered. If the youngster can maintain their resolve for fifteen minutes without eating the marshmallow, they will be given a second marshmallow to enjoy.
- Despite the fact that the majority of youngsters were able to control their appetites, the study brought attention to a problem known as delayed gratification.
- This is a difficult one!
- Delayed gratification is the polar opposite of hyperbolic discounting in terms of behavior.
- For the time being, our minds are pre-wired.
- the image’s source In order to learn, the brain employs a technique known as hyperbolic discounting.
Scientists all agree that the brain’s goal is to “maximize the expected value of reward,” as the phrase goes. The brain maximizes the anticipated value by obtaining it as quickly as possible rather than waiting longer to do so.
Hyperbolic Discounting! It’s Everywhere!
When was the last time you witnessed someone use this technique? In fact, I just came across it while doing research for this essay on a website that I was previously unaware of: This cognitive bias, however, has far-reaching consequences that extend beyond sales tactics and commercials. Coronary artery bypass graft surgery is performed on hundreds of thousands of patients each year, according to the American Heart Association. Their lives are saved as a result of the procedure. In the long run, however, it can only save their lives if they make the necessary lifestyle modifications in their daily lives.
- According to the National Institutes of Health, the situation is as follows: There will be no smoking.
- Diet that is more nutritious.
- Tragically, “ninety percent of those patients choose to forsake survival and comfort in favor of the short-term pleasures of unhealthy eating and idleness,” according to the study’s findings (source).
- Discounting at an exaggerated rate.
- This does, in fact, provide yet another indicator of the pernicious nature of excessive discounting.
- Leave the results to one side for the time being.
- It’s not as graphic as the last example, but it’s just as devastating: Credit cards are accepted.
A buyer can get their hands on something valuable right away!
Alternatively, they might wait and save the money they would otherwise have to pay in exorbitant interest rates.
Because of the idea of hyperbolic discounting, millions of individuals have become entangled in a vortex of financial debt.
To be clear, I’m not implying that hyperbolic discounting is widespread and mind-boggling in its scope.
What is it about the majority of individuals that prevents them from saving for retirement?
the image’s source If you could spend $200 tomorrow on a good dinner at a nice restaurant, why on earth would you put that money into a retirement fund to enjoy when you are 72?
the image’s source You see what occurs, don’t you?
Hyperbolic discounting is a terrifyingly effective tool.
I’ve used the instances above to demonstrate the enormous power of hyperbolic discounting, but I also want to use them to provide a cautionary note about the practice.
On a macroeconomic level, hyperbolic discounting can have catastrophic consequences for the economy. Resulting from smaller-scale efforts such as conversion optimization or ecommerce, for example, are harmless, useful, and suitable.
Put Hyperbolic Discounting to Work
Are you prepared to put this cognitive bias to work for you in the conversion machine? Keep in mind that this is rather harmless material. In this place, there are no coronary bypass surgeries or credit card retirement scandals to be found. Work like this is done with integrity, and here’s how it’s done:
1. Raise your price. Wait for the reward.
In exchange for delaying payment, hyperbolic discounting provides you the right to raise your price at any time. Buyers are less concerned about the price of an item when they are offered the option of deferring their payment. The reason behind this is as follows. As soon as they discover they are not required to pay immediately, the consumer ceases to consider paying. Instead, the hyperbolic power of the product’s availability controls their way of thinking and doing. Instead of thinking, “Wow!
That’s affordable!” “I’ll take it right now!” According to the hyperbolic principle, the concept of “wow, I can have that right now” is going to win out.
You’re all set to make a profit.
2. Advertise this: Buy now. Pay later.
Hyperbolic discounting is one of the most popular types of hyperbolic discounting used in marketing today. “Buy now! Pay later!” is a tactic that you may be more familiar with. QVC.com is jam-packed with every type of marketing approach imaginable, and it’s free to use. Go check these out if you want to put your delayed gratification muscles to the test a little. Alternatively, you could say “no.” PayPal’s controversial Bill Me Later scheme (which has since been renamed) was founded on the psychological theory of hyperbolic discounting in its entirety.
It doesn’t get much clearer than this:
- Please do not send any money. Purchase now and pay later
- It doesn’t get any simpler than this
- Simply begin your buying spree.
Montgomery Ward engages in this practice as well. A credit card application is being processed at the same time as you see this message. What I said regarding credit cards is still fresh in your mind. Yes, it is based on the principle of hyperbolic discounting. To make advantage of this strategy, you do not need to accept credit cards from your customers. You may simply postpone payment, enabling the user to make a purchase while waiting for payment to be processed. It’s a risk for you, but it has the potential to increase revenue.
3. Give an immediate gift.
When it comes to hyperbolic discounting, time is critical. It is for this reason that some people refer to it as “temporal discounting.” In the consumers’ perspective, the most important consideration is the time factor. As opposed to being willing to wait for any length of time, they will act voluntarily in order to acquire something instantly. In many circumstances, a straightforward and reasonably priced present will sufficient. Users will sometimes convert based on the promise of an immediate result, even though the whole product will not be accessible for many weeks or months.
EA Access allows gamers to participate in a program in which the most significant findings will not be published until later. Gamers, on the other hand, are more inclined to convert since they have quick access to the vault.
4. Charge a higher price for a shorter term.
Have you ever observed that certain websites offer payment plans that don’t make any logical sense from a purely financial standpoint? Here’s an example of what they have to offer: Please, hold on a second! I’m good at math. Knowing that there are twelve months in a year isn’t a problem for me. I’m also aware that if a year costs $39.99, a month at the yearly rate costs only $3.33, which is a significant savings. So, why would anyone pay $9.99 for a month’s worth of service? You might wonder why.
- The user want to pay less money right away.
- (This would be the case if a month costed $9.99, because 12 months at that price would cost $119.88, making $39.99 a savings of $39.99 over the regular price.) They are approaching the problem from a temporal standpoint rather than from a real value standpoint.
- Users can choose between paying $29.95 per month or $11.66 per month.
- Of course, it’s the number 11.66!
- The way in which a price is presented has a significant impact on how that price is perceived.
- Instead of saving money in the long run, they would rather save money in the short run.
- Users have the option of selecting their preferred payment method.
5. Pay for referrals right away.
Online affiliate schemes are extremely popular, yet many are not well thought out. Here’s how they function: Customers that recommend friends to the company are rewarded with money when the friends sign up. Here’s an example of a Payoneer screen shot: Isn’t that great? No, not in the traditional sense. Who has the time to sit around and wait for their buddies to join up? Despite the fact that the payoff might be substantial, the delay is intolerable. Keep in mind that consumers want it now. This is how Brinkster goes about his business: Which of the two approaches is more strategic?
If you provide, for example, ten cents for every friend who refers a friend, you may reward the friend who recommended the friend 10 dollars.
In the past, you could have had to pay as much as $10 for a single reference if you followed the traditional pay-when-they-sign-up strategy.
With the pay-now concept, you may compel the person who referred you to make 100 times as many recommendations as you did originally! The concept here is based on the concept of hyperbolic discounting. It is preferable to receive a small reward immediately rather than a large reward later on.
6. Offer mail in rebates.
What is the purpose of mail-in rebates offered by various retailers? You’re supposed to cut a coupon, scan your receipt, and submit them to some time-consuming website in exchange for a teeny-tiny check for a few dollars that will arrive in the mail in 20-40 weeks. Is there anyone out there that wants to do this? If I had to endure such torture, I’d prefer pay $50 rather than go through it. the image’s source Who has the luxury of time for that? Do retailers truly believe that they are doing you a favor by offering you a discount?
- They’re employing a technique known as hyperbolic discounting.
- To put it another way, there aren’t many people.
- People are more inclined to purchase the goods now, in the hopes of receiving a discount in the future, rather than later.
- The retailer is not required to make any payments.
You should read this post if you want to improve your conversion rates and increase your marketing power with clever marketing strategies. I speak from personal experience. This is something that my clients like about me. Despite the fact that hyperbolic discounting may appear to be gibberish, it is pure treasure. There are a few of things you can do with this article. Even in your own life, you may see the pernicious effects of hyperbolic discounting in action. (Wait a minute, what about that retirement fund?) And you may experiment with it to see what effect it has on conversion optimization.
a little about the author: Mr.
As the CMO and CEO of technological companies, Jeremy has gained a comprehensive grasp of human behavior as well as profit-enhancing strategies.