Extreme Discounting

When we are presented with distant commitments, we tend to stumble on the difficulty that our brain has in placing us in the future with any degree of accuracy.

Why is that?

Because our brain evolved to make determinations about our existing environments and to predict immediate threats and rewards, it’s a stretch to gain perspective even a few weeks into the future.

Our brain is always happy to capitalize on an immediate reward.

When combined with the challenge to gain future perspective, this desire for immediate rewards nevertheless sets us up for a range of problems.

Economists call this tendency Extreme or Hyperbolic Discounting.hyperbolic discounting

Scenario:

When offered a cookie today or two cookies tomorrow, waiting seems intolerable and we eat today.  When offered one cookie in 365 days or two cookies in 366 days, waiting suddenly seems easy and we say we would wait.

People more heavily discount the immediate than the distant future, because they prefer a small but immediate payoff over a larger payoff down the road.

Some discounting is rational; nonetheless, investors, for example, consistently take it to the extreme.

Investors who have decades ahead of them to invest for retirement, trade in and out of the market to avoid small, short-term losses almost always at the expense of long-term returns.

Not only does such inconsistency threaten much of social science, it also threatens our retirement experience.

It also suggests that what we want depends upon when it is asked of us.

So, how do we get around such evolutionary ingrained heuristics?

These 3 methods might be helpful:

1) Research on Excessive Discounting of the future suggests that removing the lure of immediate rewards by pre-committing to decisions works.

For example the favorite issue of saving for retirement: Some companies have successfully implemented programs that use pre-commitment strategies that allow employees to commit future income, like increments or bonuses, to retirement plans.

2) Elaborating the value of future rewards can make decisions more future oriented.

Someone who saves today consumes less, causing his or her current utility to decline.  Over time, the savings grow, increasing the amount of goods that the individual can consume and, therefore, the person’s future utility.

Working with people and encouraging them to elaborate on future outcomes and to consider future uses for money (goal setting) does help to get around those heuristics.

3) A complementary route that deals not with present and future rewards, but with present and future selves.

In line with research that shows that people might faildue to a lack of belief or imaginationto identify with their future selves, it is suggested that allowing people to interact with age-progressed renderings of themselves (= computer algorithms that forecast how physical appearances would change over time) would cause them to allocate more resources to the future.

In four studies, participants interacted with realistic computer renderings of their future selves using immersive virtual reality hardware and interactive decision aids.  In all cases, those who interacted with their virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones.

This was caused by imagining the future self who would benefit (or suffer) from the outcomes of the decisions made today.

Philosophers, psychologists, and economists (that’s like almost everybody) argue that an important determinant of intertemporal choice is a person’s senseor lack thereofof psychological connection with his or her future self.

Hence, to people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.

Recent research has argued that consumers suffer “empathy gaps” and as such, might misunderstand how they would feel in the future about the decisions they make in the present.

me and future self 2015-07-28

Future self is happy

Thus, in cases of major decisions, we might want to picture our future selves first, and then think about how we want our story to be told in the future.

This would be a great way to assess our response to decisions: Craft the story now, so that we would be proud to tell our Tacomob-story* later.

 

“Plan for the future, because that is where you are going to spend the rest of your life.” — Mark Twain

“A healthy psychological immune system strikes a balance that allows us to feel good enough to cope with our situation but bad enough to do something about it.” — Daniel Gilbert

 

* Taking-Care-Of-My-Own-Business-Story

On the same topic you might want to watch Daniel Goldstein’s TED Talk  describing tools that help us imagine ourselves over time, so that we make smart choices for Future Us. (16 mins)

2 Comments

  1. Hi Tacomob

    This is an excellent write up on now versus the future and to some extent the concept of delayed gratification and I really enjoyed the way you put in in a different way.

    Really nice to read your article written intelligently and from a different viewpoints.

    B

    • Hi B,

      Nicely put, everything seems to be a trade-off between now and the future. I guess that is a nice challenge each of us has to answer for her-/himself.

      Thinking about it, I guess I shall write a bit more about the future and now. Stay tuned.

      Appreciate your encouraging words. Thank you.

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