One of my former cofounders works at a
predatory lender startup that helps finance smartphones for people with bad credit. Yeah, maybe these people shouldn’t be buying new phones.
We criticize poor people for spending frivolously – maybe they deserve to be poor. Maybe they more frequently fall victim to predatory lenders. Low-income Americans are also statistically prone to obesity. Maybe they’re fat because they can’t afford health care. Maybe they’re fat because they can’t afford to shop at Whole Foods.
No. People with poor credit are poor because they spend outside their means. Fat people are fat because they eat crap and don’t exercise enough. Sorry, those are the only reasons.
Why do they do that?
These groups suffer from steep hyperbolic discounting. Present bias. Given the option of choosing between a dollar today and two dollars next year, the poor person chooses a dollar today.
A completely rational agent would recognize that, given prevailing interest rates, a dollar today is in fact worth a dollar and half a penny next year, therefore receiving two dollars in a year is the much better deal.
What if we told the agent that it should optimize for a lifespan of only two weeks?
Then it would most certainly choose a dollar today. This agent would also opt for immediately buying an iPhone on 3 years of high-interest payments, as well as the $10 all-you-can-eat mozzarella sticks at TGI Fridays. Why not? The game ends in two weeks!
The poverty-stricken are not irrational, they’re merely optimizing for much shorter timeframes.
Uncertainty shortens your time horizon. People who don’t know how they will afford to feed their families next month have trouble optimizing beyond the current month. How can you optimize for the immeasurable?
That’s why scarcity drives short-term greediness.
It’s not just poor people. Hyperbolic discounting most frequently manifests in the form of procrastination. An hour right now is worth more than an hour next week. I am far more likely to vacuum or do laundry to avoid some really onerous task ahead of me. Even though vacuuming is dumb, it results in an immediate good feeling of accomplishment. It took me two years to change my oil because I didn’t know what to do about a stripped drain bolt. Because the solution is unfathomable, I would rather optimize for the short term and do nothing.
Avoid hyperbolic discounting by setting very short term goals in the context of a longer term. Living paycheck to paycheck? Set a daily budget to put something aside. Have a ton of work to do? Set a minute-by-minute schedule.
Or just embrace hyperbolic discounting and optimize for the present. You never know when you might get hit by a bus.