Why do we do things that aren’t in our long term interests?

We care more about things that are about to happen than things that will happen a long time in the future. This is pretty rational. To give a financial example, I should prefer to have £100 today than £100 in a year’s time, since in the meantime I might be able to invest that £100 to earn some extra money.

A perfectly rational being would discount future events exponentially with a constant rate. If I discount the future at a rate of 110% per year, say, I would be indifferent about receiving £100 now, £110 on 31/12/18, or £121 on 31/12/19, and so on.

However, in 1975, economist George Ainsle published an important paper, Specious reward: a behavioral theory of impulsiveness and impulse control, in which he argued that humans tend to discount the future not exponentially, but hyperbolically. This means that we give near events much much more attention than they deserve. To continue the financial example, in an early study subjects said they would be indifferent between receiving $15 immediately or $30 after 3 months, $60 after 1 year, or $100 after 3 years. These indifferences reflect annual discount rates that declined from 277% to 139% to 63% as delays got longer, in contrast to exponential discounting, where the rate would be constant.

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