Definition
Hyperbolic Discounting
Hyperbolic discounting is our tendency to strongly prefer smaller rewards now over larger rewards later, valuing the present far more than the future.
It is why people splurge today instead of investing for a retirement decades away, take the instant gratification of a new gadget on EMI over building savings, and procrastinate on tax-saving investments until the last minute. The further away a reward, the steeper our irrational discount of it.
This bias is the behavioural root of under-saving. Counter it by making the future automatic and the present harder to raid: salary-day SIPs that invest before you can spend, locked-in instruments such as PPF or NPS, and visualising concrete future goals make tomorrow feel more real and worth funding today.
Related terms
- Financial IndependenceFinancial independence is the point at which your investments and passive income can cover your living expenses, so working for money becomes a choice rather than a necessity.
- Time Value of MoneyThe time value of money is the principle that a rupee today is worth more than a rupee in the future, because today's rupee can be invested to earn returns.
- Step-up SIPA step-up SIP automatically increases your periodic investment amount at set intervals, aligning contributions with rising income and accelerating wealth accumulation.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.