Would you prefer a nice crisp $50 dollar in your hot little hands today, or would you prefer to receive $55 in 10 months? Chances are, you chose the instant money, despite the fact that waiting would give you 10% more — a rate you’d kill for from your bank’s savings account.
That preference for instant gratification is human nature, but it’s also the reason why we have so much trouble saving for retirement, losing weight, and quitting unhealthy habits. Our brains are wired to prefer the instant, the immediate and the now over the future. Behavioral economists refer to this psychological quirk as hyperbolic discounting.
Hyperbolic Discounting and Decisions
Put simply, we “discount” things that will happen far in the future as being less important than those things occurring right now. Yes, I’d love to fit back into my size 6 dress for my class reunion in April, but the chocolate cake is in front of me right now! We have all fallen victim to those decisions that we have later come to regret. Sometimes we even know that we will regret those decisions while we make them, but the instant gratification exerts such a pull that we chow down on the cake while we think “I’m going to hate myself for this in April!”
The hyperbolic discount ceases to have an effect when you place the decision past a certain time threshold. In the money example above, would your decision be any different if I asked you whether you’d like $50 on February 4, 2013, or $55 on December 4, 2013? Since you are waiting for the money anyway, it is easier to decide to wait the additional week for the extra money.
Borrowing From Future Selves
Jerry Seinfeld has a very funny bit about Night Guy vs. Morning Guy. When Jerry’s having a great time at night, he stays up late, continuing the fun. He’s Night Guy, and he doesn’t worry about getting up early in the morning. That’s Morning Guy’s problem, and boy does Morning Guy hate Night Guy.
That in a nutshell is what is happening with hyperbolic discounting. We push today’s consequences onto our future selves without worrying about how it will affect that future self. We’re basically saying that it’s not our problem, even though it will be when the time comes.
Credit cards build their business on this borrowing from a future self. Since credit is so readily available, it’s very difficult to save up money now to buy something later, when in our heads later sucks! It’s easy to fall for the instant gratification now and convince ourselves that later can take care of itself.
Combating Hyperbolic Discounting
This is not an easy effect to buck, as focusing on the immediate and the now served our ancestors very well. In a world where death was around every corner, it made sense to grab for all the instant gratification you could get. But now that we live in a time when planning for the future is not only possible but imperative, we need to find ways to rationally deal with our preference for instant gratification.
When it comes to saving money, the important thing is to take the decision out of your hands. Have your contributions taken out automatically before you even touch your paycheck. Without a choice, there is no temptation.
For credit cards, there is something to the old advice about freezing your cards in a block of ice. It forces you to take a moment (or an hour of defrosting) to think about the purchase you want to make and decide if it’s really something that will make your future self happy you whipped out the plastic.
Making decisions with your future happiness in mind can help to fight hyperbolic discounting, even though it can be difficult to determine what will make you happy in the future. But if you know your version of Morning Guy will want to strangle you for what you’re about to do, step back and do what you know Morning Guy would prefer. Make those kinds of decisions often enough, and it will become second nature to think about the consequences of your actions before you jump in.