hyperbolic discounting
Hyperbolic discounting is the human tendency to wildly overvalue what we can have now and undervalue what we could have later.
In plain English
Offered ₦10,000 today or ₦12,000 next month, most people take the ₦10,000. Offered ₦10,000 in a year or ₦12,000 in thirteen months, the same people happily wait.
It is the same one month wait for the same extra ₦2,000. The only difference is that one of them starts now.
This is hyperbolic discounting, and it is the single reason saving is difficult for almost every human being. The future feels abstract, and the present is standing right in front of you holding something you want.
It explains nearly everything people do wrong with money. Spending the bonus rather than investing it. Postponing the pension until next year, every year, for fifteen years. Taking the loan for the wedding. Choosing the pleasure now over the freedom later, repeatedly, for a decade, and then wondering where the decade went.
You cannot reason your way out of it, because it is not a thinking error. It is how you are built.
What works is removing the choice entirely. A standing order that invests on payday, before the present has a chance to argue with the future. Automate the decision when you are calm, and the version of you who is tired on a Friday never gets a vote.
Do not fight it. Bypass it.
You intend to invest what remains at the end of each month. For eleven months, nothing remains. In month twelve you set a standing order for payday, and suddenly ₦100,000 is invested every month without your involvement. Nothing changed except who was deciding.
Questions people ask
Why is saving so hard?
Because the present is vivid and the future is abstract. It is not a character flaw, it is a feature of how humans weigh time.
How do I overcome it?
Do not try to overcome it. Bypass it, by automating the saving so it happens before you can choose otherwise.
Does this affect everybody?
Yes, including people who know exactly what it is. Awareness helps surprisingly little, which is why automation matters so much.
Last reviewed