Topic Trick or Treat

Why we fall for hyperbolic discounting

Winter is my favourite season. What’s not to love? Sweaters to hide all those tummy rolls, pumpkin spice latte, late mornings, cosy weather and the most important one (at least for me) Halloween!

Although trick and treating is fun, my favourite part of Halloween will always be eating candy with my siblings at the end of the festival. My mom used to make a deal with all of us; either we eat all the candy we could on that one night, or we got to take one candy each with our school lunch every day for the entire month of November.

Which one do you think we picked? But, first, let me give you some context - Because we were kids, we could only eat 5-8 pieces of candy at one go, and there were no candy or products with sugar available in the cafeteria in our school.

Now, don’t you think we would pick the second option of taking candy to school for a month? But, sadly, we always chose the first option of hogging as much candy as possible in that one night.

Why do you think we chose instant gratification over a bigger reward? Firstly, yes, we were kids and stupid. However, secondly, and more importantly, humans, in general, are inclined towards picking immediate rewards over rewards that come later in the future, even when these immediate rewards are smaller. This inclination is also known as Hyperbolic Discounting.

More examples of hyperbolic discounting would be people choosing to consume drugs or smoking for a momentary rush of dopamine over long term well being. Or, people spending money on clothes or other luxuries over saving them for the future.

As demonstrated in the above examples, hyperbolic discounting can often lead to poor decision making. Such decisions that prioritize short-term gratification often neglect our long-term well-being. Not only for individuals but hyperbolic discounting can be bad for various professions as well. For example, an organization only focusing on the goals for the next quarter might not make adjustments necessary for future benefit. Even policymakers or government parties focusing only on political gain during their term can be bad for the country’s future.

In most cases, we are well aware of the drawbacks of hyperbolic discounting, but we still fall for it. Why do you think this is? First and foremost, when we are making decisions, we always like to go for certain options. We want certainty to the extent where we settle for rewards that are smaller but certain over more significant rewards with less certainty. Secondly, we don’t like waiting. Think about it, isn’t waiting for something we want difficult? Similarly, waiting for a reward get’s difficult; therefore, most people pick instant gratification over delayed and often better rewards.

Now that we have looked at hyperbolic discounting and why it happens, let’s look at why I am telling you about it!

When it comes to driving more conversions, hyperbolic discounting can be a boon. All you need to do is incorporate it into your marketing strategy.

Here is how you can use Hyperbolic Discounting to your advantage:

(a)  Raise your price but delay payments - If you delay the payments, customers don’t think about paying but about the reward they will be getting. It automatically takes away the focus from cost, and the goods or the services become more important. As soon as you take away the attention from the price, it gives you a licence to raise your price.

(b)  Create a point system - In my opinion, Starbucks does this the best. No matter how much people want to save money by making their coffee at home, they end up falling for the point system at Starbucks or any other cafe. You get an immediate reward for buying coffee or anything else, and you also get to track your rewards through an app. What else could the impatient customer in you want??

Something like this could be perfect for an e-commerce business. Make your product/service more enticing by adding a layer of point system!

(c) Offer free shipping above a specific price - When your customers head to the checkout and realize that they have just fallen short of the amount required for free shipping, they will (in most cases) go for instant gratification, which is free delivery. The more rational choice of only buying what you need will be overlooked due to hyperbolic discounts.

You can take many other steps like offering multiple pricing options, for example, $15/week for 30 minutes or $48/week for 120 minutes. In this case, most people will choose the first option, although, in the long run, the second one is cheaper.

Similarly, look for what else you can do to give your customers what they want right now! Remember, time is the key here. Any reward that’s delayed will be overlooked for something instant!

Some quick takeaways -

●     Humans, in general, are inclined towards picking immediate rewards over rewards that come later in the future, even when these immediate rewards are smaller. This inclination is called Hyperbolic Discounting.

●     Hyperbolic discounting can often lead to poor decision making. Such decisions that prioritize short-term gratification often neglect our long-term well-being.

●     Hyperbolic discounting can be incorporated into the marketing strategy to get better conversions and other advantages.