Temporal Discounting: The Psychology Behind Future Reward Depreciation

Temporal discounting is the everyday experience of valuing more immediate rewards over those in the future. A central theme in behavioral economics and neuroeconomics, temporal discounting can help us appreciate how our financial decisions are not always rational. Understanding the phenomenon, also known as time discounting or intertemporal choice, can help us make better decisions.

Understanding this tendency is vital in personal finance, public policy, and health. For example, it could help explain why some struggle with long-term financial planning or engage in behaviors with immediate rewards but long-term negative consequences, such as smoking and other unhealthy habits.

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.

Repeating our example, many people would prefer $100 now to $110 in a day, 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; it’s that 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 it’s skipping a workout, wasting money on a rash purchase, or opting 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 and therefore dismissed.

Factors Influencing Temporal Discounting

Psychological Factors

1. Impulsivity: A tendency for impulsivity can lead to a greater pull toward temporal discounting.
2. Risk tolerance: Those who are more risk-averse may lean toward immediate gains over uncertain future rewards.
3. Emotional state: Emotions like stress or pleasure can skew our preferences for immediate versus future rewards.

Contextual Factors

1. Social influences: Peer pressure and societal norms can influence our discounting choices.
2. Past experiences: If you’ve been burned waiting for future gains that never materialized, you may be more inclined to opt for immediate rewards.

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

We balance immediate needs and desires daily against long-term goals and well-being. Temporal discounting effectively nudges us toward the immediate gratification side of the scale at the expense of self-control. This psychological tendency profoundly affects our ability to make rational decisions and exercise patience, many times leading us to act against our best interests.

One of the more intriguing aspects of temporal discounting is how it distorts our perception of value. We might recognize on an intellectual level that saving money, eating healthily, or pursuing an education has long-term value. However, the immediacy of a new purchase, a tasty meal, or having a late night out with friends can cloud our judgment. This overrating of immediate value can make it challenging to stick to financial plans and achieve our long-term goals.

Temporal discounting doesn’t just affect our choices; it also has a long-lasting impact on the opportunities we miss. For instance, waiting to save for retirement or pursuing further education can lead to financial instability and limited career advancement later in life. In health, choosing immediate gratification over long-term well-being can lead to chronic conditions that are not only costly but also life-altering.

There is also the emotional cost. When we give in to immediate gratification, there’s frequently a fleeting sense of pleasure followed by regret or guilt. Conversely, making a choice that aligns with long-term goals can provide a more lasting sense of satisfaction and accomplishment.

Temporal Discounting in Various Domains

Temporal discounting subtly convinces us to opt for immediate pleasures like dining out or buying the latest gadgets while neglecting long-term financial planning related to our investments or retirement funds. You might think spending a little extra today won’t hurt, but seemingly insignificant expenditures can accumulate into a significant financial loss over time.

Finance

In personal finance, saving, budgeting, and long-term planning often take a back seat because of temporal discounting. The satisfaction derived from having a growing savings account or the peace of mind from following a well-thought-out budget might seem too distant compared with the instant gratification of a new purchase.

As a result, many people who have the means to live more comfortably might live paycheck to paycheck, unable to break free to build a financial cushion for emergencies or the future. This short-term focus jeopardizes financial stability and limits the freedom to make choices that could lead to a more fulfilling life.

Quick returns tempt investors through day trading or “hot” short-term investment options. These trades might provide the thrill of immediate gains, but they often carry higher risks and can result in significant losses. Moreover, focusing on short-term wins detracts from the steady, long-term growth that more conservative investments like bonds or index funds can offer. It’s a striking paradox—though investing is fundamentally a long-term endeavor, temporal discounting can lure even seasoned investors into making shortsighted decisions.

The irony is that the financial world teaches the value of time through the power of compound interest. Investments can grow exponentially over time, but the appeal of immediate rewards usually overshadows this reality. As a result, many people miss chances to leverage time to their financial advantage, compromising future security for present indulgence.

Consumption

“Buy now, pay later” marketing reveals how sellers might take advantage of temporal discounting. Whether it’s online shopping, fast fashion, or quick-service restaurants, the market is designed to capitalize on our present bias. It feeds our urge for immediate possession and enjoyment, encouraging unnecessary spending.

This pattern of behavior doesn’t just affect individual wallets; it has broader implications for environmental sustainability. The drive for immediate consumption contributes to resource depletion and waste, creating a cycle that’s difficult to break. Recognizing the role of temporal discounting in our consumer habits is a first step toward more sustainable choices that benefit not just ourselves but the planet as a whole.

Health

For health and well-being, temporal discounting poses a unique challenge. The gratification derived from unhealthy foods or skipping a workout is instant, while the benefits of healthy choices, such as better physical fitness or the reduced risk of disease, are apparent only much later. This makes it more challenging to stick to a diet or exercise regimen.

Moreover, we frequently underestimate the long-term health effects of such behavior. Neglecting regular exercise or indulging in unhealthy foods might not deliver immediate repercussions, but they set the stage for potential health issues like obesity, diabetes, and cardiovascular disease. In the long run, the immediate pleasure could lead to costly medical bills and lower quality of life.

Addiction

Addictions to substances like alcohol and drugs or behaviors like gambling show how the tug of immediate reward can become overpowering. This is where temporal discounting reveals its most destructive effects. The immediate “high” or pleasure received from the addictive activity can block out, for the moment, severe long-term consequences such as the resulting health problems, social isolation, or even legal troubles.

Breaking free of addiction is particularly challenging because the immediate costs of quitting, like withdrawal symptoms, are highly tangible and immediate. They can easily overpower the ability to work toward the longer-term benefits of sobriety and well-being, making recovery a far steeper uphill climb.

Strategies to Manage or Overcome Temporal Discounting

What can we do about temporal discounting? Awareness is the first step. By recognizing this psychological tendency, we can develop strategies to make choices that align better with our long-term goals and values. Whether setting up automatic contributions to a retirement account or finding healthier coping mechanisms than comfort food, understanding the quirks of temporal and hyperbolic discounting can be key to unlocking a more purposeful and fulfilling life.

1. Goal visualization: Keeping your long-term goals in view can reduce the temptation of immediate rewards.
2. Delayed gratification training: Practicing postponing smaller rewards can help build up your tolerance for waiting.
3. Accountability partners: Having someone who can help keep you on track can significantly reduce the effects of temporal discounting.
4. Automate your decisions: Setting up direct deposit, automatic retirement plan contributions, recurring stock purchases, dividend reinvestment, and other tasks that can be automated can keep your impulses at bay.

The Bottom Line

Understanding temporal discounting can empower you to make better decisions in different aspects of life. From your finances to your health, understanding this psychological phenomenon can give you the tools to plan for a more fulfilling future.