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Hyperbolic Discounting
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A cognitive bias which explains why people prefer smaller, immediate rewards rather than larger rewards in the future.
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Introduction
People are naturally impatient, and despite being good at planning for the future, are usually terrible at making decisions that sacrifice today for tomorrow.
- Choosing to eat junk food today, rather than focusing on long term health.
- Spending $100 today, rather than saving and investing that cash.
- Opting for a $100 reward today, rather than a $120 reward in a week.
It's one of the reasons why payday loans are so effective—people can spend now.
The present value of the reward is being discounted in a trend that follows a mathematical curve called a "hyperbola".
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Potential impacts
Churn
- If the value of your app is very long term (e.g., investing, life insurance) you're constantly fighting people's short term preferences (i.e., seeing the cash leave their account, that they could be spending).
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Written by Peter Ramsey
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