Pedro Arantes
HomeContactNow

# 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

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

$g(D) = \frac{1}{1 + kD}$
• 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

RecommendationsDo you want to see all posts instead?
System Mental Models