Are You a Victim of Hyperbolic Discounting?

are you a victim of hyperbolic discounting?

Here are a couple of words you don’t see put together much: hyperbolic discounting. It’s what the whole Marshmallow Test is all about and it’s yet another cognitive bias that helps us make quick decisions that don’t always work out for the best.

In the 1960’s a psychologist named Walter Mischel at Stanford University launched a classic experiment that later came to be called the Marshmallow Test.  He left individual four-year-olds in a room with a marshmallow. They were told they could eat the marshmallow whenever they wanted, but if they waited for him to return, he’d give them two marshmallows. Some kids waited 20 minutes for Mischel’s return. Others gobbles their marshmallow within a minute.

So think about this for a minute.

  • Do you take the time to consider all options or do you just want to get the deal done?
  • Are you saving for retirement (2 marshmallows in the future) or do you spend all your money now (1 marshmallow spent RIGHT NOW)?
  • You’re standing at a checkout and you’re given the option of an immediate coupon for 10% off at purchase or a mail in rebate of 20%, which would you choose?

Whole industries have sprung up to take full advantage of people who are most likely to choose the one marshmallow NOW. There’s the credit card industry, which is predicated on the one-marshmallow-person’s choice to go for the instant gratification. Only those people who know how to keep their impulse monkey in check should walk around with a credit card in their wallet. All others are likely to fall victim to the instant gratification model on which credit cards have made billions of dollars.

The buy-now-pay-later industry is in close second place. When they let you take home the new furniture without having to pay a cent for months and months, they move you from, “that’s a lot of money,” to “I can have it NOW!” That’s a win for hyperbolic discounting and a loss for you.

Mischel went on to track the success of the kids he worked with in the marshmallow experiment. Those who waited longer went on to get higher SAT scores, got into better colleges and had higher levels of success as adults. The ability to defer gratification for the sake of increased outcomes leads to success. Does that mean all those marshmallow eaters are doomed to never having a plan for the future?

If you’re a victim of hyperbolic discounting — if you would have eaten the marshmallow lickety-split — all is not lost. While differences in our ability to wait emerge early and persist, our ability to wait can improve with conscious effort. And it isn’t a matter of sheer willpower. It turns out the people who are most successful at resisting temptation do so by thinking about other things.

Distraction. That’s the key. Just as you would distract a crying baby, or a toddler so you can take something out of their hand without them noticing, you can also distract your impulse monkey.  Feel the pull of the online shop? Move away from your device and go for a walk. Feel the need to splurge? Distract yourself by cleaning out your closet, weeding your garden, or planning a fancy meal you’ll cook at home.

Another way to combat hyperbolic discounting is to make your long-term, future-friendly choices automatic so the instant gratification monkey never even sees it.  (Just remember, if you save $50 and you put $50 on your credit card that you don’t plan to pay in full by the due date, YOU HAVEN’T SAVED ANYTHING.)

Setting small, manageable goals that are quickly achievable will also work to defeat hyperbolic discounting. A big goal that takes forever to achieve – like paying off that student loan – is easy to shove under the rug when a dinner out with friends tonight or a trip somewhere warm this winter presents as an alternative. Instead, make the successes as immediate as possible. Get creative. Get a big poster board. Draw a tree. Then cut out leaves to tack onto the tree. Label each leaf “$100” and every time you pay off $100 on your student loans, you can rip off a leaf.  As you denude your tree, you’ll feel great!

Category: Budgeting, Debt Management |

Jan 28, 2019


About Gail Vaz-Oxlade

Gail Vaz-Oxlade is the Gemini-award winning host of Til Debt Do U$ Part, Prince$ and Money Moron. She hosts The Monday Night Late Shift on NewsTalk1010 where she talks about life, the universe & everything. Gail blogs daily at and contributes to Gail is determined to eliminate financial illiteracy in Canada, and encourages people to join to raise their Money IQ. Her books include: Debt-Free Forever, Easy Money, Never Too Late, Money-Smart Kids, It’s Your Money, Money Rules and Saving for School. You can also follow her on twitter @GailVazOxlade.

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