(Hyperbolic) Discounting / Present Bias (Incl Hot-Cold Empathy Gap, Time Value of Money)

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Hyperbolic Discounting / Present Bias Mental Model: Executive Summary

If you only have three minutes, this section will get you up to speed on the hyperbolic discounting / present bias mental model.

The concept in one quote:

From a political point of view, seven years was a millennium. - Richard Rhodes Click To Tweet

from Richard Rhodes’  The Making of the Atomic Bomb TMAB review + notes)

Hyperbolic discounting / present bias in one sentence: humans, as well as other animals, have a natural tendency to vastly overvalue the present and undervalue the future, while also dramatically overestimating our future self-control.

Three brief examples of present bias / hyperbolic discounting:

Empirical proof that the Redskins suck.  I may be biased because I’m a Cowboys fan, but I particularly enjoy Richard Thaler’s discussion of NFL draft picks in “ Misbehaving – M review + notes – my favorite book, one we’ll touch on in this model.  Thaler notes, with analysis, that teams dramatically overvalue early draft picks and current-year draft picks, partially thanks to  overconfidence.

But there’s another amusing angle: Thaler gave the Redskins some great advice on the mathematics of their draft… and what did they do on draft day in 2012?  Trade three first round draft picks, and a second-round draft pick, for the #2 pick, with which they selected RGIII (now a down-the-chart backup, and not even for the Redskins.)  Why did they make this logic-defying decision?  Because Snyder wanted to win NOW – hyperbolic discounting.

(In fairness, Jerry Jones has been guilty of hyperbolic discounting on many an occasion too – the Joey Galloway trade in the early 2000s, for example.  But it’s more fun to pick on the Redskins!)

CARTMAN: I can't take it anymore, you guys. The wait for Nintendo Wii is literally killing me.
CARTMAN: I can’t take it anymore, you guys. The wait for Nintendo Wii is literally killing me.

Every day time is slowing down. It’s like… waiting for Christmas.  In South Park’s Season 10 episode “Go God Go,” spoiled brat Eric Cartman is in agony because the Nintendo Wii doesn’t come out for another three whole weeks.  In desperation, he decides to freeze himself to make time pass quicker… hilarity ensues.

As usual, Matt and Trey were onto something: as we’ll explore, not just kids, but even highly educated and intelligent adults, tend to overprioritize the present – and make bad decisions for the future as a result, like not watching our diet and not saving for our retirement.

BUT I’M MAD NOW!!!  Notwithstanding how many times we’ve said mean things in anger – and later come to regret them – many of us (myself being no exception) keep doing it.  One antidote?  Structural problem solving.  

This may be apocryphal, but both Mark Twain and Abraham Lincoln were reputed to write critical letters to satisfy their urge to express their anger… then stick ’em in a drawer instead of mailing them.

Now, it’s worth noting that on page 26 of “ Mistakes were Made (but not by me) – MwM review + notes – psychologists Carol Tavris and Elliot Aronson note that conventional wisdom on catharsis is wrong: “decades of experimental research” find that expressing anger just makes us angrier.

So, YMMV – but it is, at least, a solution in line with one suggested as reasonable by Cass Sunstein and Richard Thaler in “ Nudge – a great book we’ll explore.  (See Ndge review + notes).

If this sounds interesting/applicable in your life, keep reading for unexpected applications and a deeper understanding of how this interacts with other mental models in the latticework.

However, if this doesn’t sound like something you need to learn right now, no worries!  There’s plenty of other content on Poor Ash’s Almanack that might suit your needs. Instead, consider checking out our learning journeys, our discussion of thesalienceinversion, or margin of safety mental models, or our reviews of great books like “ To Engineer is Human” ( TEIH review + notes), “ Zero to One” ( Z21 review + notes), or “ Internal Time” ( IntTm review + notes). 

Hyperbolic Discounting / Present Bias: Deeper Look

“Our sensations being very much fixed to the moment, we are apt to forget that more moments are to follow the first, and consequently that man should arrange his conduct so as to suit the whole of life.  

Your attribution appears to have been applied to your life, and the passing moments of it have been enlivened with content and enjoyment, instead of being tormented with foolish impatience or regrets.”

– Benjamin Vaughan (in a letter to Benjamin Franklin, featured in “ The Autobiography of Benjamin Franklin – ABF review + notes)

One of the fundamental principles of finance is “time value of money.”  That is, the idea that me handing you a dollar today is worth less than me handing you a dollar in the future.

You can ascribe various reasons for this: for example, the idea that you could put that money to productive use in the meanwhile, the fact that you’re not going to live forever and would like to spend your money at some point, and the fact that the future is uncertain and lots of things could happen between now and then.

Discount rates are non-homogeneous, which is a fancy way of saying that different people have different discount rates based both on individual preference and the risk you’re willing to accept.  For example, obviously, you’d demand a higher interest rate from an investment like the stock market with a potential for loss than you would from your FDIC-insured checking account with functionally no risk of loss.

Note that the same idea can be applied to experiences or time as well as money: a nice meal on your next birthday should be worth somewhat less than the equivalent nice meal today.

It doesn’t really matter what discount rate we use for the purposes of our discussion here, but it does matter (for mathematical consistency) that it’s consistent.  Otherwise, we run into absurdities like having a preference today for X vs. Y in a year’s time, and then in six months, suddenly preferring something else.

For the sake of our long-term happiness, which we theoretically care about, we need to rationally discount what we’ll want in the future – our health and our retirement savings – and plan appropriately in the present.

But our actual actions don’t reflect this at all.  Actual human behavior is present-biased; or, in other words, we discount hyperbolically.  The exact numbers don’t matter, but the general idea is that we tend to over-focus on the present.

In fact, the way our minds typically work is that we dramatically value the present, we modestly value the near to medium term future, and anything beyond the horizon might as well not exist.

This has a lot of implications for making good decisions, as we’ll get into.  For example: beyond those discussed in the introduction, Dr. Jerome Groopman, in his wonderful (and relatively unknown) “ How Doctors Think,” (HDT review + notes) cites Dr. Stephen Nimer on patients’ tendency to hyperbolically discount:

“Most of the patients I have encountered who refused treatment do so because they are so focused on the downside […]

they are only thinking about what’s happening to them that day.”  

This plays a role in mindfulness, too: Laurence Gonzales observes in Surviving Survival (SvSv review + notes) that:

“when you’re in the midst of a crisis, it can sometimes seem as if your distress will go on forever… for most people in most situations, the pain does not go on forever.”

Hyperbolic Discounting Agency / Willpower = “Hot/Cold Empathy Gap” or “Planner-Doer”

The classic explanation of hyperbolic discounting is the “marshmallow experiment,” in which kids’ ability to delay gratification is tested by giving them a marshmallow (or another sugary treat) and offering to give them more such treats if they can successfully prevent themselves from eating it for some period of time.

I won’t expound at length because:

A) Samir’s First Law of Psychology Books is that pretty much all of them mention the marshmallow experiment (or the gorilla experiment, or Milgram).  In fact, no fewer than seven books reviewed on this site mention the marshmallow experiment – and I may be missing some!

B) you can just go watch the hilarious / adorable videos.  Or call up a friend with a small child and conduct your own experiment.

Suffice it to say that the net result of these studies is that it takes a lot of effort to do something as seemingly simple as not eating a treat.  Intriguingly, it’s not just humans on whom this test has been conducted: animals take equivalent tests.

Cashews are objectively the worst nuts. Cockatoos are crazy. Other fun fact from this book, which I discuss in the culture mental model: escaped Australian cockatoos taught their wild cousins naughty words, so cockatoos in the Outback occasionally swear at humans.
Cashews are objectively the worst nuts. Cockatoos are crazy. Other fun fact from this book, which I discuss in the culture mental model: escaped Australian cockatoos taught their wild cousins naughty words, so cockatoos in the Outback occasionally swear at humans.

Richard Thaler – who has a well-documented and completely inexplicable thing for cashews –  might be particularly intrigued to learn, for example, that cockatoos will wait up to eighty seconds to eat a cashew instead of a pecan.  This is a fun fact I picked up from Jennifer Ackerman’s delightful “ The Genius of Birds ( Bird review + notes).

Much of Thaler’s most successful work deals with the idea of hyperbolic discounting and its implications for self-control problems; two chapters of “ Misbehaving” ( M review + notes) – my favorite book – delve deep into it, and the whole book touches on i

For now, here’s one of the important takeaways that is related, though not exactly the same: psychologists have discovered that we have something called a hot-cold empathy gap – one of the most overlooked cognitive biases – which basically stipulates that when we’re in “cold” states, i.e. we’re not hungry/aroused/angry/exhausted, we vastly underestimate how powerfully those states will influence our behavior in the future.

One example can be found in Dr. Matthew Walker’s “ Why We Sleep ( Sleep review + notes) – my candidate for most important book of the century, no hyperbole.  Walker notes that sleep-deprived study subjects, who are as impaired after 10 days of sleeping six hours per night as they would be if they’d just pulled an all-nighter:

“consistently underestimated their degree of performance disability.  It was a miserable predictor of how bad their performance actually, objectively was. […]

With chronic sleep restriction […] that low-level exhaustion becomes their accepted norm, or baseline.  

Individuals fail to recognize how their perennial state of sleep deficiency has come to compromise their mental aptitude and physical vitality, including the slow accumulation of ill health.”

Walker makes the analogy to a bar drunk who thinks he’s still fine to drive.

That works via  inversion as well: when we’re hungry/aroused/angry/exhausted, we think we’re making far more rational decisions than we actually are.

Of course, there’s a classic quip about this involving men having, uh, various body parts, and only enough blood to power one of them at a time…

In less salacious settings, my favorite example of this is the well-replicated finding that we buy more food (for the future) when we’re hungry (now).  Given that snacks stimulate your appetite, this is part of the rationale behind mouthwatering samples at Costco… and part of the reason that many people’s freezers are full of food that sounded tasty at the time, but never gets eaten.

If you integrate the hot-cold empathy gap with hyperbolic discounting and  willpower, you get Richard Thaler’s “Planner-Doer” model, overviewed wonderfully in “ Misbehaving ( M review + notes).  This thoughtful conception (sadly) does not appear to have been adopted by behavioral economists at large.  So I will do my very best, as a one-man army, to spread its glory far and wide.

Thaler, basically, adapts the principal-agent problem (a subset of local vs. global optimization) into a two-track view of the human mind: one altruistic “planner” trying to maximize the total utility of a series of “doers” who exist only for a short period of time (say, a day each) and care only about the present.

My own conception of this is, similarly, that we experience life as a series of moments, as expressed by the Benjamin Vaughan quote above.  So we essentially have a hot-cold empathy gap with relation to ourselves: it’s hard for us to step outside our current schema and have empathytowards our future selves.

It is tremendously useful because the practical output (particularly if you believe in willpowerdepletion, on which I know there is some controversy) is that it completely undermines and destroys the “ grit” approach to the world.  It’s a losing battle.

Much better, if you literally conceive of your future self as someone who needs protection from the (cumulative) actions of your current selves, is structural problem solving, specifically utilizing forcing functions (see memory), activation energyhabit, and so on.

This is the route Thaler recommends, by way of second-order decisions, or “rules” – for example, it’s much easier to stick to a “rule” of only having dessert on weekends that you’ve made into a  habitthan it is to avoid the temptation of dessert when one is presented to you.

Check out “ Misbehaving ( M review + notes) for more fascinating exploration of this topic.  I also explore Thaler’s “Save More Tomorrow” plan – which not only counteracts, but actively utilizes for good, this hyperbolic discounting tendency – in the  structural problem solving model.

More details are also available in “ Nudge ( NDGE review + notes), which we’ll touch on in the next section.

Hyperbolic Discounting / Hot-Cold Empathy Gap x Utility x Local vs. Global Optimization x Overconfidence: Why Love is Necessary, But Not Sufficient, For Marriage

Here’s a bombshell: science demonstrates that being in love is a terrible reason to get married.

I hear some of you raising your eyebrows (don’t ask how the physics of that work.)  But love seems to be a “necessary, but not sufficient” component if you want to be happily married.

Let’s explore why.  To start with, here’s some data on the overconfidence of newlyweds from one of our favorite books, Cass Sunstein and Richard Thaler’s “ Nudge ( NDGE review + notes):

“Unrealistic optimism is at its most extreme in the context of marriage.  In recent studies, for example, people have been shown to have an accurate sense of the likelihood that other people will get divorced (about 50 percent).  

But recall the fact that they have an absurdly optimistic sense of the likelihood that they themselves will get divorced.  It’s worth repeating the key finding: nearly 100 percent of people believe that they are certain or almost certain not to get divorced!

It is in these circumstances, and in part for that reason, that people are immensely reluctant to make prenuptial agreements[,] believing that divorce is unlikely, and fearing that such agreements will spoil the mood…”

Ouch.  And yet I’m sure many readers who are currently in love are thinking: “well, I’m / we’re the exception…”

One of the most thoroughly documented learnings from mental-models oriented broad reading – particularly in psychology – is that when we think we’re exceptions, that’s almost always not the case unless there’s tangible evidence to back it up.  In no particular order, here’s an overview of data to that point:

– people who are sleep deprived underestimate how sleep deprived they are, and routinely underestimate how much sleep they actually need (“ Why We Sleep” by Dr. Matthew Walker – Sleep review + notes)

– people routinely underestimate the extent to which they’re affected by advertising. (“ Zero to One” by Peter Thiel –  Z21 review + notes)

– people routinely overestimate the accuracy of their memories. Among others,“ Mistakes were Made (but not by me) by Tavris/Aronson – note also, in the  memory mental model, that even a repeat National Memory Champion is notoriously absentminded, forgets her grocery list, and lives by Post-it notes.)

– people routinely overestimate their ability to make accurate forecasts within confidence intervals (“ Superforecasting” by Philip Tetlock –  SF review + notes)

So, if you’re not so angry that you’ve clicked away from the page, bear with me as we explore this tricky concept of love through the lens of mental models.

The first premise has nothing to do with love per se, but simply to do with the fact that we often have “dynamically inconsistent” preferences, as Thaler puts it in “ Misbehaving ( M review + notes).

In a layman’s interpretation, this basically means that we might both (now) prefer to eat that gooey warm cookie, and later (in the future, when we’re looked at our naked reflection in the mirror) prefer to have not eaten that cookie.

Indeed, in the context of love, preferences change rather predictably over time: one of my clients, an economist by training, framed it as “market preferences [for romantic partners] shift over time.”  The kind of people who we like at 25 are not necessarily the kind of people we’ll like at 35, 45, or 55.

The difficulty, then, is in solving the  local vs. global optimization problem: who we like most today ( local optimization) may not be who we’ll like most over the course of our marriage ( global optimization).  For example, someone who’s interesting and fun to hang out with might not be the settle-down type who will make a good partner to manage a budget and raise a family.

Similarly, one of my mentors offered another example: thanks to novelty-seeking and  contrast bias, drama and “crazy” can actually be fun for a while, but get old really quickly over the long-term.

So that’s premise 1.  Premise 2 is that there’s a long and documented history – not just among humans, but among animals in general – of “sexual selection” (i.e., who we choose to mate with) not necessarily being correlated with who we should mate with, judging by  utility-driven standards of genetic fitness of offspring, or our future happiness.

Sam Kean does a wonderful job of exploring this notion in “ The Violinist’s Thumb ( TVT review + notes), an intriguing book about the practical consequences of genetics in our lives.

Among many intriguing stories is one about the eponymous violinist – Paganini – who had a genetic defect (either “Ehlers-Danlos” or “Marfan” syndrome) which caused him grievous health issues.  It also made his hands hyper-flexible… because of which he is widely acknowledged as the greatest violinist of all time.

Naturally, as Kean explores, women swooned over Paganini’s otherworldly melodies – even though, from a  utility perspective, Paganini was profoundly unsuitable as a source of genetic material.  Kean:

“[Paganini’s] DNA hardly made him worthy stud material: he was a mental and physical wreck.  It just goes to show that people’s sexual desires can all too easily get misaligned from the utilitarian urge to pass on good genes.  Sexual attraction has its own potency and power…”

Indeed, this model isn’t only seen in humans.  Jennifer Ackerman, in the delightful – and highly educational – Genius of Birds ( Bird review + notes), also touches on this idea of sexual selection.  Just like humans, some species of birds go to extreme lengths to impress prospective mates, expending time and resources on activities that are otherwise completely non-value-added.

The male bowerbird, for example, builds an elaborate courting area with shiny plundered treasures.  Similarly, many males impress females with the delivery of their songs – not unlike Paganini above.

Ackerman highlights that song quality could be a reasonably proxy for a healthy bird: young birds that are deprived of nutrition, for example, don’t develop their songs quite as well.  Yet on the whole, the evidence is mixed.  Ackerman observes:

“It’s not clear whether a male’s song performance actually correlates with his performance on other cognitive tasks.  The evidence is mixed.”

Ackerman goes on to cite Ronald Fisher’s “pioneering model of sexual selection” which posits that:

 “extravagantly beautiful traits – even when not useful – may have evolved simply because they were preferred by the opposite sex.”  

You can probably see where I’m going with this.  The final piece is the hot-cold empathy gap hyperbolic discounting angle.

And boy is it interesting. Helen Fisher’s “Anatomy of Love” (a book I enjoyed a lot, but don’t have a review of yet – recommended, though!) provides some interesting insights.  One being that – somewhat unsurprisingly, but perhaps nonintuitively – our brains on love look a lot like our brains on cocaine:

When neuroscientists Andreas Bartels and Semir Zeki compared the brains of happily-in-love participants with the brains of euphoric addicts who had just injected cocaine or opioids, many of the same regions in the brain’s reward system became active.

It doesn’t take a neuroscientist to deduce that when we’re in love, we might perhaps not make the most rational decisions (something we’e all certainly seen other people in our lives do, if not ourselves.)  Is the overconfidence finding discussed by Sunstein/Thaler a surprise, then?

Other research, in fact, suggests that addiction might actually hijack neural pathways originally designed for social connection.  Olds/Schwartz, in “ The Lonely American ( TLA review + notes), cite some of this research.

What does all of this amount to?   Base rates strongly suggest that:

1) there is not a great correlation between the people we’re attracted enough to to sleep with, and the people who, from a strictly biological/genetic sense, offer the best genetic material;

2) there is not a great correlation between the people we’re in love with and the people we want to live with over the long term;

3) when we’re in love, we’re perhaps structurally impaired, and definitely overconfident in, our ability to make an accurate assessment of what our future, not-so-in-love selves will want.

What’s my advice?  Well, that’s way the hell outside my  circle of competence: relationship experience is not something I have much of (I’ve been too busy reading to date anyone!) and it would certainly be  overconfident of me to claim I’d be immune to the phenomena discussed above – let alone advise anyone else on how to deal with them.

So, instead, I’ll simply cross-apply a piece of advice from someone else.  In a completely separate context, researcher Christopher Barnes (who I admire) stated the following about training managers to adjust for their ( culture-caused) tendency to discriminate against night owls:

As with other areas of unintentional but proven bias, the advice is to increase managers’ awareness of their tendency to stereotype and why it is invalid.

They must be continually reminded to recognize their cognitive tendencies and adjust for them.”

Awareness is half the battle.

Application / impact: becoming aware of our tendency to discount hyperbolically is important in everyday situations like grocery shopping, but even more important when we’re making critical long-term life decisions – like that on who we should marry.

Hyperbolic Discounting Dose-Dependency: Sometimes A Little Present Bias Is Okay…

We’ll keep this last section super brief.

As Jordan Ellenberg wittily observes in “ How Not To Be Wrong ( HNW review + notes), sometimes it’s not so wrong to be wrong. I discuss most of these points in other models, so apologies for the repetition, but I feel they’re important to drive home.

Even Richard Thaler – a very bright and thoughtful behavioral economist who advocates that we think more like  econs than humans – admits to thinking like a human sometimes.  For example, Thaler ignores opportunity costs when drinking old wine he’s already bought.

Similarly, there are times when present bias actually makes sense.  The above discussed models more or less assume that equivalent experiences can be had in the future, so we can use a constant discount rate to compare the value of an experience today with an experience tomorrow.

But the truth is that life’s not like that.  We’re only undergraduates once and after college, there’s often not a similar opportunity (especially for males) to make the sort of lasting, lifelong friendships that college often creates.

We’re only young and able to accomplish certain athletic feats, or enjoy certain pastimes, at certain points in our lives.  Plenty of hard-charging executives have dropped dead of a heart attack before they got the chance to retire and finally enjoy life.

Our kids are only in grade school once.  Our relationships with them will change forever when they enter junior high – and high school – and when they go off to college.

So it is possible to overcorrect too far against our present bias, and lead a life of perpetually delayed gratification – an “I’ll be happy and relax when X” ride on the hedonic treadmill.

The truth is we never reach X – when we get there, we just replace it with Y; when we reach Y, we replace it with Z.  Shawn Achor explores this idea in “ The Happiness Advantage ( THA review + notes), a book which changed my life.

Similar ideas could even be raised with money: frugality is great, but we don’t get to take our money with us.  If you’re going to die with millions of dollars in the bank, you can afford to drive a nicer car than an old beater, like many stubborn historical value investors insisted on doing, and the  opportunity costs thereof will be low, while the utility will be high.

These are not usually problems for the general population.  But they’re certainly potential problems for the long-term-focused readers of this website, which is why I chose to highlight them.

Application / impact: as with anything else, don’t take a long-term thought orientation too far.