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Avoiding hyperbolic discounting

August 8th, 2013

Given the choice between $50 now and $100 in a month many people will take the $50 now. This is almost always a bad decision, in that you don't get twice as much value for your money today so later you'll wish you'd taken the $100. [1] This tendency to think present expenditures are critical gives us high interest credit cards, installment plans, carrier subsidies for cell phones, and payday loans.

Sometimes money now really is more valuable than money later. If learning how to juggle would dramatically increase my earnings capacity then there should be some way to set things up where someone who has money pays for my juggling lessons and they get repaid once I'm a highly compensated juggling master. Similarly, if you come up with an improved design for snorkels and want to build a factory to produce them, it's useful if you can borrow some money until you're selling your awesnorkmels. Without lending these opportunities would be limited to people who already have money.

Access to credit is a big mix. Sometimes people invest and get access to options they wouldn't have otherwise, sometimes people spend the money on minor luxuries and then have to keep paying interest. As a society we'd like to support the first but discourage the second. The current system works ok, but can we do better? Some ideas:

What else might work? What targets the harmful uses of credit without limiting the beneficial ones?

[1] This isn't just a large exponential discount rate: many people who would prefer $50 now to $100 in a month would not prefer $50 in a month over $100 in two months, even though that's the same choice viewed from a month away.

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