Time Discounting

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There is a psychological phenomenon known as time discounting. Basically, it means that a desired result in the future is perceived as less valuable than one in the present. For example, if you allow people to choose from being paid an amount in one year as opposed to being paid a smaller amount now, they will settle for a much smaller payment right now than they will in the future. There has been some research done on this and scientists found that a $100 payment in 12 months is just as attractive as $68 right now for the average person. This means that on average, people will discount the value of a gain made in one year by 32% over how they would value the gain made immediately.

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Time discounting applies to areas other than money as well. In particular it effects the way we perceive our efforts in the area of time management and organization. For example, spending half a day organizing your work space will give you benefits in the future, but it has a present cost. Because of time discounting, you are likely to underestimate the amount of benefit being organized will give you in the future. Another task that is 31% less beneficial, but with immediate results will likely appear to be more attractive.

Time discounting explains some of the reasons we procrastinate. Working on something that isn’t due for 2 weeks often has a lower perceived benefit than doing something much less important right now. This explains why it is sometimes easier to spend an evening watching television instead of preparing for a presentation that is coming up in a few weeks.

Just being aware of time discounting can be a big benefit. If you realize that you are likely to underestimate the value of future gains, you can compensate in your planning. Another possibility is to assign a “value” metric to each of your tasks. If you can do this ranking from a third person perspective and think about the value of the task and not when it needs to occur, it will give you better insight into its actual benefit.

Reference:
“Individual Differences in the Use of Time Management Mechanics and in Time Discounting” in Individual Differences Research, Vol. 4 No. 3, pp. 194-207

Originally published on June 9, 2007.

Comments

  1. says

    Actually, it’s not a “percieved” value, it’s an actual value. A dollar today is worth more than a dollar down the line because of your ability to earn money from your money. Plus, taking account inflation, a dollar today is worth more than a dollar 10 years from now when adjusted for inflation. It’s one of the first things they teach you in finance classes.

  2. Julie B says

    I wonder if the preference for getting paid a little now instead of more later has something to do with the socio-economic status of the people being polled. In Ruby Payne’s book on poverty, she talks about the the different value systems of the people in generational poverty vs. the middle class and the wealthy. People in generational poverty live for the moment. They don’t trust the future. They would rather have a sure thing than something that might happen in the future, even if it is a better deal. Even if the people polled are not in generational poverty, I wonder how many of them don’t believe that the future payment will happen? Companies go under. Banks close. As the saying goes, a bird in the hand is worth 2 in the bush.

  3. says

    I never really thought about how things in the future are perceived in this manner. Interesting post. I’ll definitely have to remember it with all of the long-term things I’m working on right now.

  4. says

    @Leah Nass – We are talking about a pretty steep discount that goes well beyond inflation and potential earnings. If someone is willing to take $90 now instead of $100 in 12 months, it might still be rational based on inflation, earning potential, etc.

  5. says

    You describe a very important fact here. This might be one of the key hurdles why many people have difficulties in achieving their long distance goals.

    I good way to cope with this is to break down your goals into sub-targets which are not so distant but important to achieve the goals. According to the theory we should be more energetic working on the closer sub-targets.

    I have been writing on time management and collecting tips on how to save time here and there every day. One essential chapter is on goal setting, so that keep pursuing them.

    http://memytime.wordpress.com/

    Please come and have a look sharing your thoughts and ideas.

  6. Lalit says

    This relates quite well to the covey’s 4 quadrants, particularly the IInd which is where we “need” to be spending our maximum time at in order for us to further ourselves, create better value.

  7. says

    I’ve known about this phenomenon for a while now, but didn’t have any practical use for it other than to “keep it in mind” in my decisions. So I always try to make the best choice for my whole life rather than just for today. I like the idea of being more explicit and actually assigning values to tasks based on it. Will definitely give that a go.

  8. Al Pittampalli says

    Just simply taking 20 minutes planning your day in the morning, can save you so much time over the course of the day. It sounds so logical, but it can feel so counterintuitive in the moment!

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