hyperbolic discounting

By January 17, 2012Leadership

The following is an excerpt from a great article in The Atlantic entitled “This is Why You Don’t Go to the Gym” by Derek Thompson.

People are way too optimistic about their willpower to work out, Stefano Dellavigna and Ulrike Malmendier concluded in their famous paper “Paying Not to Go to the Gym.” In the study, members were offered a $10-per-visit package or a monthly contract worth $70. More chose the monthly contract and only went to the gym four times a month. As a result, they paid 70 percent more per visit than they would have under the plan they rejected. Why? Because people are too optimistic that they can become gym rats, which would make the monthly package “worth it.” Silly them.

You might call this behavior “laziness.” Economists prefer “hyperbolic discounting.” This is the theory that we pay more attention to our short-term well-being and “discount” rewards that might come further down the road. Think of a small reward in the distant future, like taking a nap three weeks from now. Doesn’t hold much appeal, does it? But when the small reward is imminent — Take a nap right now? Woo hoo! — it’s considerably more attractive. Given the choice between small/soon rewards versus larger/later benefits, we’ll take the former. Hyperbolic discounting helps to explain why Congress can’t pass deficit reduction, why drug addicts stay addicts, why debtors don’t pay off their bills, and why you keep telling yourself that the right day for exercise is always “tomorrow.”