In behavioral economics, hyperbolic discounting refers to the empirical finding that people more often prefer smaller payoffs sooner to larger payoffs later when all the payoffs come relatively soon than when all the payoffs are distant. The term was first used by Richard Herrnstein.

For instance, when offered the choice between $50 now and $100 a year from now, most people will choose the immediate $50. However, given the choice between $50 in five years or $100 in six years most people will choose $100 in six years.

In order to explain this observation, it was hypothesized that the discount function with regards to time is shaped like a hyperbola. In other words, people will "discount" in order to get the payoff sooner (over short horizons) at a higher rate, but at a relatively low rate over long horizons.

More recently these observations about discount functions have been used to study saving for retirement, borrowing on credit cards, and procrastination.

References

• Ainslie, G. W. (1975). Specious reward: A behavioral theory of impulsiveness and impulsive control. Psychological Bulletin, 82, 463-496.