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LIVE EACH DAY AS IF IT WERE YOUR LAST – BUT ONLY ON
SUNDAYS
Hyperbolic Discounting
You know the saying: ‘Live each day as if it were your last.’
It features at least
three times in every lifestyle magazine, and has a slot in every self-help manual’s
standard repertoire, too. For such a clever line, it makes you none the wiser. Just
imagine what would happen if you followed it to the letter: you would no longer
brush your teeth, wash your hair, clean the apartment, turn up for work, pay the
bills?. . .?In no time, you would be broke, sick and perhaps even behind bars.
And yet, its meaning is inherently noble. It expresses a deep longing, a desire for
immediacy. We place huge value on immediacy – much more than is justifiable.
‘Enjoy each day to the fullest and don’t worry about tomorrow’
is simply not a
smart way to live.
Would you rather receive $1,000 in a year or $1,100 in a year and a month?
Most people will opt for the larger sum in thirteen months – where else will you
find a monthly interest rate of 10% (or 120% per annum!). A wise choice, since the
interest will compensate you generously for any risks you face by waiting the
extra few weeks.
Second question: would you prefer $1,000 today cash on the table or $1,100 in
a month? If you think like most people, you’ll take the $1,000 straight away. This
is amazing. In both cases, if you hold out for just a month longer, you get $100
more. In the first case, it’s simple enough. You figure: ‘I’ve already waited twelve
months; what’s one more?’ Not in the second case. The introduction of ‘now’
causes us to make inconsistent decisions. Science
calls this phenomenon
hyperbolic discounting
.
Put plainly, the closer a reward is,
the higher our
‘emotional interest rate’ rises and the more we are willing to give up in exchange
for it. The majority of economists have not yet grasped that we respond so
subjectively and inconsistently to interest rates.
Their models still depend on
constant interest rates and are correspondingly questionable.
Hyperbolic discounting
, the fact that immediacy magnetises us, is a remnant of
our animal past. Animals will never turn down an instant reward in order to attain
more in the future. You can train rats as much as you like; they’re never going to
give up a piece of cheese today to get two pieces tomorrow. But wait a minute:
don’t squirrels manage to gather food and save it for much later? Yes, but that’s
pure instinct and – verifiably – has nothing to do with impulse control or learning.
And what about children? In the 60s, Walter Mischel conducted a famous
experiment on delayed gratification. You can find
a wonderful video of this on
YouTube by typing in ‘marshmallow experiment’. In it, a group of four-year-olds
were each given a marshmallow. They could either eat it straight away or wait a
couple of minutes and receive a second. Amazingly, very few children could wait.
Even more amazingly, Mischel found that the capacity for delayed gratification is
a reliable indicator of future career success. Patience is indeed a virtue.
The older we get and the more self-control we build up, the more easily we can
delay rewards. Instead of twelve months, we happily wait thirteen to take home an
additional $100. However, if we are offered an instant reward, the incentive has to
be very high for us to postpone the fulfilment. Case in point: the exorbitant interest
rates banks charge on credit-card debt and other short-term personal loans, both
of which exploit our must-have-now instincts.
In conclusion: though instantaneous reward is incredibly tempting,
hyperbolic
discounting
is still a flaw. The more power we gain over our impulses, the better
we can avoid this trap. The less power we have over our impulses – for example
when we are under the influence of alcohol – the more susceptible we are.
Viewed
from the other side, if you sell consumer products,
give customers the
option of getting their hands on the items straight away. Some people will be
willing to pay extra just so they don’t have to wait. Amazon makes a bundle from
this: a healthy chunk of the next-day delivery surcharge
goes directly into its
coffers. ‘Live each day as if it were your last’ is a good idea – once a week.
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