Hyperbolic Discounting: Yet Another Weapon Brands Use To Compel You To Purchase More To Boost Their Sales!

Every single one of us has been there. We forget every single plan of ours to eat healthy or save for the future whenever we see a new phone or a piece of cake. It is adding a discount on our future goals for short term goals in the present. This is exactly what scientists call hyperbolic discounting.

While this is a behavioral process, hyperbolic discounting is applicable in real life when it comes to managing your finances. Yes, it is true. Many of the times, we have found ourselves saving for the future and then compromising it immediately when something we like is available in the market.

So, what is hyperbolic discounting in reality? We call it cognitive bias. In simpler terms, most people prefer choosing the more minor and transient benefits that give them immediate joy. However, they are lenient towards the more incredible things in life for which they must strive harder.

Is this actually a healthy practice? Do we really need to compromise on our future just to have a little bit of momentary happiness? Did you know that marketers use this exact method to make you swipe your card every single time?

In this article, we shall discuss more on the psychological bias that hyperbolic spending is and how it can have serious effects on your financial health in the long term.

What does the Stanford Marshmallow Experiment tell Us?

This experiment is one of the greatest living proofs of hyperbolic discounting. Meanwhile, it was done to test whether delayed gratification is potent among children.  

Psychologist Walter Mischel conducted it at Stanford University. The experiment began with offering two choices to the children. They could enjoy a small immediate treat. Or they could wait to get two small treats. Here, patience would have bought them something more valuable.  

It was seen that the children who waited for the greater rewards enjoyed better outcomes in life. They showed traits of delayed gratification. Or the ability to hold the patience for something better in life.  

In contrast, the children who chose the one small reward did not shine as much as others. This approach is defined as hyperbolic discounting.

What Is Hyperbolic Discounting?

In simple terms, hyperbolic discounting is a psychological bias that is pretty common in humans. It happens when people start prioritizing immediate rewards and satisfaction over future rewards.  

It is a concept that is heavily used in sales and marketing to help encourage customers to make their purchases depending on all the short-term rewards or instant gratification.  

But what is instant gratification? It is a mental construct where we incentivize impulsivity. Moreover, we need something that pleases us for the time being. But why do we generally think this way?  

There are two neural mechanisms responsible for the same. Firstly, instant gratification is closely linked with the release of dopamine. Dopamine, or the happy hormone, prompts us to choose the option to make us happy NOW!  

You can also relate the phenomenon with reward processing. We crave to sense the perception of being rewarded. And we can’t wait for that.  

Hence, we also call this cognitive shortcut a heuristic. It simplifies our decision-making by making us choose what is in front of us. We can easily cut off the permutation combinations. 

A psychological bias, or as people call it, cognitive bias, is 

“the tendency to make decisions or take action in an illogical way.”

Cognitive bias is a type of systematic error in the thinking process.  

Here, the human brain simplifies data through personal experience and past preference funnels. When we show such cognitive bias, we preferably end up choosing hyperbolic discounting instead of delayed gratitude.   

When we talk about hyperbolic discounting, it means that even if you get a better and more satisfactory reward in the future, you will choose the short-term rewards. The reason? Psychological bias!

How does Hyperbolic Discounting Work?

As per theory, the process and its steps are transparent to all. But how does it take effect in real life? On a more profound thought, I could relate these practical examples with the phenomenon:  

Example Of Hyperbolic Discounting

There are multiple examples of hyperbolic discounting. Some of the most common examples may include the following:

Free Shipping Deals

These are some of the most common examples of hyperbolic discounting. How many times have you been there in the cart and could not purchase the product due to shipping charges? Well, we have all been there. Suppose you want to purchase $35, but the website requires you to purchase $50 to make shipping free. In that case, you spend more time looking for products to add to your cart. Cognitive bias justifies this situation on the immediate rewards which is free shipping with purchasing unnecessary products. If you wouldn’t have made the extra purchase, the money would have been there in your bank account, growing as required.

Read More: Indemnity Agreement: Purpose and Key Terms (Step-by-Step Guide)

Hyperbolic Discounting In Marketing And Sales

As I mentioned, hyperbolic discounting is one of the greatest ways in which brands can drive in profit. They effectively use this cognitive bias method to make their customers purchase more.

Let us learn about some of the most effective ways in which brands increase their sales through the technique of hyperbolic discounting.

Loyalty Programs And Points

Have you ever wondered how these loyalty programs and pint systems work?

They are generally reward programs that companies offer to those customers who are frequently in purchasing from the brand. Loyalty programs give the customers rewards, free merchandise, coupons, and many other advanced released products.

These kinds of rewards act as an incentive to make the customers purchase from you. These are short term and smaller rewards play with the psychological bias of the customers and offer them the immediate gratification that they are seeking.

In addition to that, the reward programs also increase the word of mouth for the brands. As per research, 70% of customers are likely to suggest a brand with a good loyalty program to their peers.

Limited Time Offers

“If I don’t buy now, the price will never be this low again. I’ll have missed a great opportunity.”

This is one of the easiest ways to trap shopaholic people like us. If I am at the store and come across a limited period offer, I am buying it. The sense of urgency works as a benefit for the customers to buy whatever is offered to them.

Some of the most popular limited period offers may include:

• [Product name] is back, for a limited time only
• Last chance! Save $25 on [product name]
• Flash sale! X% off [product name]
• Only hours left for savings on [product name]

Delaying Payment

Do you own a credit card? If so, you might be accustomed to delayed payments.

It is one of the easiest slips into the “buy now, pay later” strategy. And it takes just a swipe of the credit card to get the instant satisfaction that you can get from finally buying a product. Some of the most popular brands, like Amazon, Kohl, and Crew, all have credit card programs.

Another easy way in which you could implement the “delay payment” option is by allowing the customers to purchase the product and pay for it in increments.

People that delay payments are more interested in the short term rewards they get upon purchasing the product whenever they want it. The immediate satisfaction that one gets from buying a product that they have been wanting so badly easily outweighs the entire financial cost that they need to address in the near future.

Hyperbolic discounting over time may lead to an increase in sales. Therefore, it is important for brands to include it in their arsenal of selling and pricing strategies.

What Are The Setbacks Of Hyperbolic Discounting?

If you think that hyperbolic discounting is one good thing to follow, you are certainly wrong. There are a couple of drawbacks that you may have to face if you are too invested in cognitive bias.

Credit cards are one of the main reasons behind hyperbolic spending. The fact that one gets the freedom to spend whenever one wants and however one wants is what drives one to make more purchases. As a result, half of the United States is in debt.

Hyperbolic discounting also initiates impulsive spending. The more people are invested in cognitive bias, the more they are going to spend abruptly without thinking twice.

Read More: What Is A Third-Party Insurance Claim And How Does It Work?

Pro Tips to Overcome Hyperbolic Discounting

I would suggest a 4-step strategy to overcome the problem. These steps are:  

Leaning: we need to grow awareness of the concept. When we can calculate how our brain works, we can restrain it from thinking linearly.  

Subtracting: It is a form of pre-commitment. We must subtract the loss if we choose the immediate reward and forsake the greater reward.  

Rewards: Calculate the extra rewards and the value additions they would make to your life. It would help you to nurture self-control.  

Commit: However, your commitment is the key. Generally, we think that there will be other opportunities to earn the bigger reward in life. Hence, we let go of the immediate chance to secure it.

The Bottom Line

Cognitive discounting is a process where people impulsively do something without thinking twice about the future. While we are all guilty of committing this crime, there are a few setbacks to it, too.

It burdens people with a lot more debt and plays with their spending habits. People who love shopping can easily fall into the trap and not even consider their financial conditions anymore.

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