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The Psychology Behind Future Reward Depreciation

“How Time Affects Decision-Making and Self-Control” Time discounting is when we prefer immediate rewards over future ones, and…
The Psychology Behind Future Reward Depreciation

“How Time Affects Decision-Making and Self-Control”

Time discounting is when we prefer immediate rewards over future ones, and it’s a common part of everyday life. It’s studied in behavioral economics and neuroeconomics to see how our financial decisions aren’t always logical. Knowing about time discounting, also called time preference or making choices over time, can help us make smarter decisions.

KEY TAKEAWAYS

  • Temporal discounting is when we get rewards now instead of waiting for better ones later. It’s how our brains work, favoring instant gratification over long-term gain.
  • Hyperbolic discounting, another term for temporal discounting, can result in bad money choices, unhealthy habits, and even larger societal problems like climate change.
  • Temporal discounting affects our material choices and emotional well-being. Sometimes, choosing short-term pleasure can leave us feeling regretful or guilty later.
  • The first step is to be aware of it to overcome temporal discounting. You can use helpful strategies, such as imagining your goals and setting up automatic systems, to guide your decisions toward long-term success.

Knowing temporal discounting is crucial in managing money, making rules, and staying healthy. For instance, it can help understand why some people find it hard to plan for the future or end up doing things like smoking that feel good now but are bad in the long run.

Temporal Discounting Explained

Have you ever wondered why that piece of cake is too tempting to pass up, even though you know it could derail your diet? Or why you sometimes can’t resist spending on other immediate pleasures rather than saving for the future?

The psychological concept of temporal discounting can help explain these behaviors. At its core, temporal discounting is about how we perceive the value of time.

Imagine you’re given a choice between receiving $100 today or $110 in a month—taking for granted there are no issues of trust related to the future payment. Many would pick the immediate $100, even though the future number is greater. The extra $10 seems less valuable merely because it’s delayed. Temporal discounting relates to how we value future rewards or punishments.

While discounting is a natural extension of the time value of money, which in classical economics diminishes at a constant rate, behavioral economists have described the irrational behavior of hyperbolic discounting. Here, the value we place on future rewards drops dramatically the closer we are to receiving them.

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Repeating our example, many people would prefer $100 now to $110 daily, but very few people would prefer $100 in 30 days to $110 in 31 days—if choosing now. It seems people would rather wait one day for $10 if it happens a month from now, so their imagined future selves would be more patient than the ones deciding today. It’s not just that you’re impatient now; you plan to be more patient in the future.

Hyperbolic discounting shows that our personal “discount rate” is not constant. Instead, it fluctuates based on our mood, social context, and even the time of day. As a result, the more distant a future reward is, the easier it is to commit to waiting for it. But as the time for the potential reward approaches, the temptation to settle for a smaller, more immediate reward grows stronger.

Understanding hyperbolic discounting sheds light on why we make illogical or self-defeating choices. Whether we skip a workout, waste money on a rash purchase, or opt for fast food over a healthy meal, the appeal of immediate gratification frequently overshadows rational decision-making.

This indicates present bias, a tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. It’s why you might opt for a Netflix binge instead of an early night’s sleep or choose a sugary snack over a nutritious meal. The benefits of the latter choices are far off in the future, so they are dismissed.

Present Bias

Present bias means we often like instant rewards or fun more than things that will help us more, even when the future choice is better.

Factors Influencing Temporal Discounting

Psychological Factors

1 Impulsivity: Being impulsive can make us more likely to prefer immediate rewards over waiting for better ones in the future.

2. Risk tolerance: “People who prefer to avoid risks might choose immediate benefits instead of waiting for uncertain rewards in the future.”

3. Emotional state: “Feelings such as stress or enjoyment can affect whether we prefer instant or future rewards.”

Contextual Factors

  1. Social influences: “Influence of Peer Pressure and Social Norms on Our Choices”
  2. Past experiences: “If you’ve been disappointed by waiting for future rewards that never came, you might prefer immediate rewards instead.”

The Impact of Temporal Discounting on Decision-Making and Self-Control

“Every day, we weigh our immediate wants and needs against our long-term goals and health. Temporal discounting pushes us towards instant gratification, often making it hard to control ourselves. This way of thinking can greatly impact our ability to make smart choices and be patient, sometimes causing us to act against what’s best for us.”

“Temporal discounting changes how we see the worth of things. Saving money, eating well, or studying has lasting benefits. But when faced with buying something new, eating tasty food, or going out late with friends, we often value these things more now. This can make it hard to stick to money plans and reach our big goals.”

“Temporal discounting affects more than just what we pick now; it also affects what we might miss out on later. For example, waiting too long to save for retirement or get more education can make our money unstable and limit our job options later. And if we choose quick pleasures over long-term health, it can cause serious health problems that cost a lot and change our lives.”


“There’s also an emotional toll. Giving in to quick pleasures often feels good but can lead to regret or guilt afterward. On the other hand, making choices that match long-term goals can give us a lasting feeling of happiness and success.”

Temporal Discounting in Various Domains

“Temporal discounting tricks us into choosing quick pleasures like eating out or buying new gadgets, but we forget about planning for our future finances, like investments or retirement savings. Spending a bit extra today won’t matter, but small expenses can add up and lead to financial problems later.

Finance

“Temporal discounting often makes us prioritize instant pleasures over important financial tasks like saving, budgeting, and planning for the future. We might feel more excited about buying something new immediately than seeing our savings grow or sticking to a budget.”

“Because of temporal discounting, some people with enough money to live better struggle to save and plan for the future. They live paycheck to paycheck, without a safety net for emergencies or future needs. This focus on short-term needs can make it hard to stay financially stable and limits the chance to make choices for a happier life.”

“Quick profits tempt investors through day trading or trendy short-term investments. These trades can feel exciting with fast gains, but they also come with bigger risks and could lead to big losses. Plus, focusing on short-term wins takes attention away from the steady, long-term growth that safer investments like bonds or index funds offer. It’s a surprising contradiction – even experienced investors can fall into making hasty decisions because of temporal discounting, despite knowing that investing is about the long haul.”

“It’s ironic that finance teaches us the importance of time with compound interest, where investments can multiply over time. But often, we’re more drawn to instant rewards and overlook this fact. Because of this, many people don’t take advantage of time to build their finances for the future, choosing short-term fun over long-term security.”

Important: “Temporal discounting causes problems in retirement planning. Saving money for something far away, like retirement, often feels less urgent than immediate needs or wants. This can result in not putting enough money into retirement accounts, not taking advantage of employer contributions, and risking financial security during retirement.”

Consumption

“‘Buy now, pay later’ marketing shows sellers use temporal discounting to their advantage. From online shopping to fast fashion and fast food, the market plays on our tendency to prioritize immediate satisfaction. It encourages us to spend unnecessarily by giving in to our desire for instant ownership and enjoyment.”

“This behavior impacts personal finances and the environment. The urge for quick consumption leads to using up resources and creating waste, which is hard to stop. Understanding how temporal discounting influences our shopping habits is the first step to making eco-friendly choices that help us and the planet.”

Health

“Temporal discounting makes it tough to stay healthy. Junk food and skipping exercise feel good immediately, but the benefits of eating well and staying active appear much later. This makes it hard to stick to a healthy diet or workout plan.”

“Plus, we often don’t realize the long-term health impact of these actions. Skipping exercise or eating unhealthy food might not seem like a big deal right away, but they can lead to health problems like obesity, diabetes, and heart disease down the line. Eventually, this could mean expensive medical bills and a lower quality of life.”

Addiction

Addictions to things like alcohol, drugs, or gambling show how strong the pull of instant gratification can be. This is when temporal discounting shows its worst effects. The immediate pleasure from addictive behaviors can make us ignore the serious long-term consequences, like health issues or legal problems.

Getting over an addiction is hard because the immediate downsides of quitting, like feeling sick or withdrawal symptoms, are very real and happen right away. They can make it tough to focus on the long-term benefits of improving, like being healthy and happy again.

Strategies to Manage or Overcome Temporal Discounting

What can we do about giving in to instant gratification? First, we need to know what’s happening. Once we recognize this habit, we can devise decisions that match our long-term goals. For example, we can set up automatic savings for retirement or find healthier ways to deal with stress instead of turning to junk food. Understanding how our minds work with temporal and hyperbolic discounting can help us live a more meaningful and satisfying life.

1. Goal visualization: Staying focused on big goals can help you resist quick rewards.

2. Delayed gratification training: Delaying smaller rewards can help you get better at waiting.

3. Accountability partners: Having someone to support you can greatly lessen the impact of giving in to immediate rewards.

4. Automate your decisions: Automating tasks like direct deposit, retirement savings, buying stocks regularly, and reinvesting dividends can help control impulsive spending.

Tip: There are many ways to fight temporal discounting. One easy trick is the “10-10-10 rule.” Think about how a decision will affect you in 10 minutes, ten months, and ten years to help you see things more clearly and overcome this tendency.

What Is an Example of Temporal Discounting?

Picture this scenario: You get a surprise bonus at work. Now, you have two choices:

  • You might use that money to pay off some of your credit card debt with high-interest rates. This can help you save money on interest in the long run.
  • You might spend the bonus on buying a fancy gadget you want. While this gives you instant satisfaction, it doesn’t help your finances in the long run.


If you pick the gadget instead of paying off your debt, you’re experiencing temporal discounting. Having the new gadget right away feels more enjoyable than the future benefit of lowering your debt.

FAQs

1. What Is Temporal Discounting in Behavioral Economics?

Ans: In behavioral economics, temporal discounting is when people make choices that may seem illogical from a traditional economics perspective. Researchers and policymakers study this phenomenon to determine why individuals prefer immediate rewards over future benefits. It’s not just about comparing the values of different options; it’s about understanding why immediate rewards feel more appealing. Knowing why people act this way can help create interventions, policies, or products that encourage better long-term decision-making.

2. What Is the Temporal Discounting of Future Risks?

Ans: Temporal discounting affects not only how we view rewards but also how we see future risks. For instance, we might downplay the health risks of smoking or drinking sugary drinks because the effects don’t happen right away. We might think, “What’s the harm in one more cigarette?” or “It’s just one soda—I’ll start exercising next week.” This mindset can lead to risky behaviors because we prioritize avoiding immediate inconvenience over considering the future consequences.

3. How Does Temporal Discounting Play into Climate Change?

Ans: Temporal discounting can greatly impact urgent global issues like climate change. The immediate costs of changing, such as switching to renewable energy or protecting natural habitats, seem like a heavy burden compared to sticking with our current ways. The benefits of these actions, like a more stable and sustainable climate, might not be seen for many years. This creates a tough mental barrier to taking action. It’s easier to keep doing things that harm the environment if we don’t feel the immediate consequences. Meanwhile, the long-term benefits of making sustainable choices are overlooked because they take time.

The Bottom Line

Knowing about temporal discounting can help you make smarter choices in various areas of life. Whether it’s about money or your well-being, understanding this psychological concept can help you plan for a happier future.

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