Distant Elephants

My high school celebrated its 100th anniversary this weekend.  Through the work of many volunteers it came off better than we could have hoped.  As with all organizations of this type, a small minority of the volunteers did a large share of the work .  Probably in homage to Pareto’s law, 20% of the people generate 80% of the result.  In fairness, most of the workers don’t care.  Work of this type is its own reward.

It does however demonstrate another planning flaw that we share.  It is easier to agree to perform some task that is distant in time than it is is to agree to perform the identical task due soon.

There were some volunteers who agreed to serving without recognizing that their duties did not seem too onerous only because they were more than a year in the future.  This condition is known as hyperbolic discounting.  Twenty hours of work due a year from now is inconsequential, but eleven and half months later, that twenty hours is a suddenly a huge burden.  Same effort, same skill, same restraints on time,  just more immediate.

If humans are offered two similar rewards, they will usually choose the one that comes soonest.  If they have to wait, they will want a little more.  We know, or at least psychologists and economists know, how that happens.  Future events are “discounted” to the present and compared to the current value or cost.

There are several ways to do it.  Economists and psychologists assume “exponential discounting.”  Much like finding the value of a bond.  Use some constant rate to discount the future amount back to the present.  It is rational, easy and efficient.  In a 5% world, $100 today, should be worth $105 in a year or $127.63 in 5 years.  These results are all the same under discounting.

Theory is nice,  but not everyone uses exponential discounting, and no one uses it all the time or in all situations.  People who study this subject find that oftentimes people use “hyperbolic discounting.”

In this method, the first delay attracts a very high rate and as the time gets longer, the discount rate gets lower.  Maybe 20% or more for the first month of an obligation due.  As the time lengthens the rate falls. It sounds complicated but we use it more than we think.

Essentially, it means we ascribe meaningfulness to only those things in a short time envelope.  Exponential discounting renders things not in the envelope unimportant.

Saving pays off tomorrow, spending pays off today. Procrastination is positive.

It allows us to commit, too easily, to projects that start far in the future.  Immediate pat on the back, no meaningful cost.  It is a trap for some.  It is the distant elephant problem.

An elephant that you can see 4 miles away looks pretty small.  Not a threat.  Not a problem.  When the same elephant charges you from 30 yards away, it is a very big problem.  Same elephant, different context.

Under hyperbolic discounting, our present self makes decisions that our future self would not.  That is true even though the same variables are used by both selves. It happens because our brains are hard-wired. We cannot not do it.

We can however have the wit to recognize it, know we do it and learn to minimize its adverse effects.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

3 Comments on “Distant Elephants

  1. For what it’s worth, year-old elephant dung is a much more socially acceptable product than the newly-minted variety

  2. Pingback: Present Self – Future Self – moneyFYI

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