Hyperbolic Discounting: Why we choose things for now even if a better long-term option exists
Which would you prefer?
Getting one dollar today, or three dollars tomorrow?
According to research, individuals and companies often choose options that give them a small gain in the short term, when if they were to wait a bit longer they would receive more.
This is due to a cognitive bias known as hyperbolic discounting.
With hyperbolic discounting, people value something more if it were to happen immediately, and their value drops quickly if they were to have to wait a few days.
However, if they had to wait a longer time anyway before receiving anything, then they might show a preference to wait a bit longer for a larger reward.
For instance: “Would you prefer a dollar today or three dollars tomorrow?” or “Would you prefer a dollar in one year or three dollars in one year and one day?” (which both have a delay of one day).
Research has shown that a significant fraction of subjects will take the lesser amount today, but will gladly wait one extra day in a year in order to receive the higher amount instead.
This behaviour has even been seen in animals, which show a preference for receiving something immediately compared to more of it in the future.
Researchers believe that people and animals show a strong preference for something they can have now in the present, because there is uncertainty about whether the thing will actually come in the future if we wait.
Uncertainty is one of the fundamental fears in humans, and has a strongly negative feeling.
Therefore, people’s preference would usually be for the certainty of getting something now, rather than the risk of getting something more (but also perhaps not getting it) in the future.
This has profound implications on human behaviour, especially areas where people make decisions about money, such as economic decisions.
Hyperbolic discounting and innovation
I have worked with many companies on their project business cases.
And one of the things which companies are always looking out for are the “quick wins”.
The types of projects which are going to solve problems and deliver value almost immediately.
Innovation projects on the other hand will usually take longer to come to a scalable solution.
Innovation projects will also usually not be able to provide the same level of detail in a business case as a project which can be delivered faster will.
However, the potential rewards for executing innovation over the longer-term can be much higher than smaller, less risky, short-term projects.
Nonetheless, due to biases like hyperbolic discounting, many decision makers will prefer the certainty of a project delivering a smaller return almost immediately, resulting in a lot of innovation projects not being prioritised.
While it has not been proven in scientific study, I expect that hyperbolic discounting may also impact non-financial metrics used to develop innovation capabilities over time. When it comes to fixing issues with culture, or developing new skills and capabilities through training, decision makers often look at the easy solutions which deliver a small immediate improvement or pain-reduction, instead of the more complex and challenging efforts which take a lot of time, but may fix some of the more fundamental issues preventing long-term growth.
The opposite might also be true. There is also the issue of teams and companies which lack psychological safety. In teams where open discussion of challenges and problems is not encouraged or tolerated, people are more likely to want to avoid the immediate pain of judgement that comes from saying something which leadership does not want to hear, rather than do it even though it may result in longer-term improvement of the situation. Therefore, they may be looking for the short-term immediate benefit (avoid pain) rather than the greater reward of benefiting in the future.
This is why it is important to view innovation projects in the form of an overall innovation portfolio, to ensure that there is investment not only in short-term projects, but also more long-term innovations.
Creativity & Innovation expert: I help individuals and companies build their creativity and innovation capabilities, so you can develop the next breakthrough idea which customers love. Chief Editor of Ideatovalue.com and Founder / CEO of Improvides Innovation Consulting. Coach / Speaker / Author / TEDx Speaker / Voted as one of the most influential innovation bloggers.
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