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Avoiding hyperbolic discounting

August 8th, 2013
money  [html]
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:

  • The real problem is hyperbolic discounting where people disproportionately value the extremely near future. So put a waiting period on loans. People could still agree to lend money, but you couldn't receive the money until a week after you agreed to take it.
  • Figure out how to train people to better consider the preferences of their future selves, and get lots of people to go through this training.
  • Prohibit ursury, fine people for acting like bears.
  • Don't allow lending at all, only risk sharing. If you want to make some sort of "money now for money later" trade you find investors. They put in money, you put in work, and then when there's a payout you divide it up. The more promising your situation is as an investment process the more willing people would be to invest. This is how startups are funded, and it's been proposed for college. To buy a house you'd get a bank to go in with you as a fractional owner and you'd pay them rent in proportion to their share.
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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