Hyperbolic Discounting
Discounting future rewards at a rate that falls as the delay increases, producing inconsistent preferences over time.
How it is identified
Test: preference between two future rewards reverses as both move closer in time, though the interval between them is unchanged
Unit
qualitative
In depth
Rational discounting would apply a constant rate, so a preference set today should hold when the dates arrive. Hyperbolic discounting produces the reversal that everyone recognises: a plan made for next year is abandoned when next year becomes today. This is why commitment devices work — a decision made in advance binds the later self who would choose differently. Lock-ins, automated investments and written rules are all applications of the same principle, and their value lies precisely in removing the later choice.
Worked example
Offered ₹1,000 today or ₹1,100 in a year, most take the ₹1,000. Offered ₹1,000 in five years or ₹1,100 in six, most take the ₹1,100 — the same one-year wait for the same 10%, decided oppositely.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Hyperbolic Discounting” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.