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Hyperbolic Discounting

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

Notes

  • This theory states that humans discount the value of a later reward by some factor that increases with the delay's length.

    • 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 the equation below, where g(D)g(D) is the discount factor that multiples the reward's value, DD is the delay, and kk is the factor governing the degree of discounting:

g(D)=11+kDg(D) = \frac{1}{1 + kD}
  • 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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