Pedro Arantes
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Hyperbolic Discounting

This theory states that humans discount the value of a later reward, by the factor that increases with the length of the delay.
#economics
Zettelkasten, April 06, 2021 (changes)

• The hyperbolic discounting theory states that humans discount the value of a later reward by the factor that increases with the length of the delay.

• People tend to choose a smaller-sooner over a large-later reward as the delay occurs sooner than later.
• It's a decision mental model because it can help you evaluate the reward between two choices at different times.

• It's a system mental model because it enables you to understand your and others' choices.

• It's mathematically described as:

$g(D) = \frac{1}{1 + kD}$

where $g(D)$ is the discount factor that multiples the reward's value, $D$ is the delay, and $k$ is the factor governing the degree of discounting.

• It explains why humans prefer short-term to long-term rewards.

• It reveals a tendency to make choices that are inconsistent over time.

• We regret some decisions we made in the past, despite knowing the same information.

References

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