Hyperbolic discounting: what it is, examples, and how it is used in marketing

Human beings are faced with various situations in which we must choose an option among all those that we have available, trying to anticipate future consequences and anticipating what might be the most advantageous. To do this, we have a brain that is a powerful tool capable of making decisions continuously; however, it is not always right to choose the best option, since a series of cognitive biases can intercede.

The hyperbolic discount, in the field of economics, refers to that propensity to choose the immediate reward, even if it is smaller, instead of waiting longer to get larger rewards. This is because the fact of being able to achieve a reward immediately has a great power of attraction.

In this article we will see what exactly hyperbolic discounting consists of and what its relationship to economics and decision-making is.

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What is hyperbolic discounting?

In recent years, a concept that is used mainly in the field of economics and whose name is "hyperbolic discounting" has aroused considerable curiosity. This concept is also being actively studied by researchers in neuroeconomics, a branch that attempts to explain how the human decision-making based on various variables, on the ability of the human being to process several alternatives and follow a direction based on which Act.

When speaking of hyperbolic discount, we refer to that propensity of some people to opt for an immediate reward, even if it is smallerinstead of waiting longer to achieve a higher reward. This is because the fact of being able to achieve a reward immediately can be very attractive. On the other hand, as the delay in time to obtain a reward increases, our perception of its value will decrease, meaning that the subjective value of rewards has a tendency to decrease with time. weather.

In addition, hyperbolic discounting, in the field of economics, is a delay discounting model that is inconsistent over time, being one of the fundamental bases in the study of behavioral economics.

On the other hand, it is considered a cognitive bias that encourages people towards impulsiveness and, therefore, immediate gratification, so that could cause us to be conditioned to make a wrong decision and it may happen that when we want to rectify it, it is already too late.

The preference for obtaining more immediate benefits over time, as occurs with hyperbolic discounting, can prevent us from achieving greater rewards in the long term, and it is that when making decisions, people have a tendency to normally opt for the most safe; hence, the preference for short-term rewards. For this reason, it is quite common that we are more willing to accept a small but sure reward, rather than expect to get higher profits because they are less secure because we might not get them.

As stated above, hyperbolic discounting is a cognitive bias that can cloud our thinking and make us lose reason, a way that leads us to opt for an immediate, but smaller reward, instead of waiting to be able to achieve a greater reward, due to what future rewards are of less value to our brain than those that can be taken advantage of in the present moment.

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Examples of hyperbolic discount

Next, we will see some examples that help us to better understand what the cognitive bias of hyperbolic discounting consists of in everyday life.

Hyperbolic discounting can become well established in our daily habits, affecting various areas of our lives. First of all, we can find How does this bias affect feeding? And it is that a person who is hungry, is more likely to choose a more appetizing food, such as a cake, instead of a piece of fruit, because at that time it is quite unusual for him to think about the benefit that a piece of fruit will have for his health in the medium and long term term.

Notably, hyperbolic discounting bias was observed in the famous experiment by Stanford University researchers Walter Mischel and Ebbe B. Ebbesen in 1979 known as "Marshmallow" (candy marshmallow). In this experiment, the researchers sought to analyze children's ability to delay obtaining a reward, which is also known as “delayed gratification” or “deferred gratification”.

To analyze the delayed gratification of these children, the researchers offered them an immediate reward, leaving a treat on the table in front of them and they were told that if they could go 15 minutes without eating the treat in front of them, they would get another treat plus.

The results showed that there was a positive correlation between being older and having a greater ability to delay gratification, as well as it was observed that the children who wait to get the second treat tended to be those who had a greater success in the studies; Therefore, a greater number of cases of hyperbolic discounting was found in younger children and those with lower academic performance.

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How is the cognitive bias of hyperbolic discounting used in business?

The advertising and marketing departments of large companies have thoroughly analyzed and studied the ways people behave and their way of making decisions when making purchases. In addition, these departments have extensive knowledge about cognitive biases. For this reason, it is important to bear in mind how large companies can take advantage of the cognitive bias of hyperbolic discounting so that people fall into their “traps” and thereby increase your sales.

Corporate marketing takes advantage of the hyperbolic discount bias in the sense that the members of this department are aware that the rewards snapshots are going to be well received by a high percentage of consumers, despite the fact that they should analyze all the options in order to obtain a greater benefit. However, the more time passes, the less attractive and less valuable a reward has, being an aspect favorable for companies that want to sell, adding to this the stress that increases impulsiveness.

Here are some examples in which the marketing and advertising departments of companies take advantage of hyperbolic discounting to successfully lose their products.

1. Increase the price of the product if the customer is late in payment

The phrase “buy now and pay later” is very recurrent.. In this sense, the hyperbolic discount bias influences the decision of many customers when buying a product when they prefer to pay a higher amount of money for a product as long as you can start paying in a few months, instead of paying a smaller amount of money if in this case it has to be at the time of purchasing the product, since the future is seen as something far.

In this way, the company manages to divert attention from the price because the customer focuses on the moment you have to pay and you see the option of not having to pay in the act of acquiring the product.

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2. Make a gift at the beginning of a purchase

A common practice used by companies consists of giving something to a customer when he has just purchased a product whose cost is much higher because in this way he manages to alter his valuation of the benefits of acquiring the product with respect to its price.

In this way, many companies give something away instantly when a product or a purchase is purchased. subscription to influence the customer's decision and encourage him to think that he will pay less.

3. High prices in the short term

Another of the most common practices of companies that are based on the hyperbolic discount theory is that in which in the short term, a lower cost is offered if a monthly payment is paid immediately than if an annual fee were paid all at once. Let's see it better with an example.

Many streaming platforms to watch series and movies offer two options to pay for the subscription. The first, paying monthly, can be more tempting because it is much lower (p. e.g., €7.99/month); while the second, pay annually (p. eg, €79.99) may seem too much to pay initially. For this reason, it is quite common for the first option to be chosen despite the fact that as the subscription year passes we will have paid more money for the subscription (€95.58; which is €15.89 more).

As we can see, the cognitive bias of hyperbolic discounting can become very decisive in our purchases if we do not think carefully enough before making each of our shopping. Although it is true that many people find it difficult to suddenly face certain purchases and have no other option than to buy in installments, even if they end up paying more money in the long run. However, there are many times when the hyperbolic discount bias works in favor of companies due to buyers' lack of reflection and impulsiveness.