#8 Temporal Discounting: Why we want $10 today, not $15 tomorrow

Despite our best intentions, selecting options that provide sensible, long term benefits over impulsive, short term ones, seems pretty much impossible. In this episode, Mel and Dan explore how our desire for instant gratification can be used to market products for today, as well as products for tomorrow.

Mel: 00:19 Hi, and welcome to Bad Decisions.

Dan: 00:21 The show that helps us understand why we choose what we choose.

Mel: 00:24 Why we think what we think.

Dan: 00:25 And how to exploit this stuff for fun and commercial gain.

Mel: 00:28 I'm Dr. Mel Weinberg, I'm a performance psychologist.

Dan: 00:31 And I'm Dan Monheit, co-founder of Hardhat, a creative agency built for today. Hit it Kops.

So I'm sitting on the couch last night. Feeling pretty good about myself, I'd actually just had a salad and some chicken for dinner.

Mel: 00:47 Good for you.

Dan: 00:47 Thank you. And just kind of gnawing at me, in the back of my mind, was this memory, that in my freezer, there was ... I want to say a quarter, but it was probably more like a third, and by third, I probably mean a half a tub of Ben & Jerry's, the Tonight Dough, ice cream.

So you know phrase ... I'm not sure if you're familiar with the Tonight Dough?

Mel: 01:07 Oh I'm familiar.

Dan: 01:08 You're familiar? It's got basically everything you could ever want in an ice cream.

Mel: 01:11 You don't need to teach me about ice cream.

Dan: 01:13 It's like peanut butter and-

Mel: 01:13 I've got it.

Dan: 01:14 Yeah, okay, cool. I knew I wanted it. I knew it was going to be delicious and I was really going to enjoy it if I just went and got it and started hoeing into it with a spoon. I try use a teaspoon, I feel better about myself, it's true.

But, so I'm sitting there thinking “today, or shall I say, tonight Dan, really, really wants to smash this ice cream. And I know tomorrow Dan is not going to be happy about it, but, fuck tomorrow Dan, he'll work it out when tomorrow gets here.”

And as this was playing out in my mind, I realised this is actually a thing I seem to do to myself often. Help me Dr Mel, help me.

Mel: 01:48 Well Dan, what I can tell you, is that you are falling victim to another heuristic.

Dan: 01:53 Another heuristic, and we happen to be recording. What were the chances!

Mel: 01:56 Who would have thought. So what we're talking about here is temporal discounting.

Dan: 02:01 Temporal discounting.

Mel: 02:02 Temporal discounting. Which is the idea that we tend to discount the value of things that are further away in time, and over value things that we can have here and now. So your behaviour is reminding me of a famous experiment that is done with little children.

Dan: 02:17 This is shaping up great.

Mel: 02:19 And you've probably seen it. And many of you might have heard of it. It's the marshmallow experiment.

Dan: 02:19 Yes.

Mel: 02:23 You know the marshmallow experiment?

Dan: 02:24 I know the marshmallow experiment.

Mel: 02:25 So what happens is, you've got a little kid, usually sort of, anywhere between four and seven years old, sitting there at a table. And the researcher comes in and the researcher offers them a marshmallow. They place the marshmallow down on the plate in front of them, and they say “hey little kid, you can have the marshmallow now if you want. But, if you wait 15 minutes, I'll come back into the room, and if the marshmallow is still there, I'll give you another one, and you can eat them both.”

Dan: 02:51 I understand what they're trying to do here. But, surely this flies in the face of not accepting candy from strangers?

Mel: 02:57 Yeah, you've got a point, but, nevertheless, what we find, is that ... and what's really interesting to me about this, is that when you actually watch it, you can see the pain and the anguish on the little kid's face, as they struggle to make this decision between satisfying their emotional need right now - which is “oh my God, there's a marshmallow sitting in front of me and, God I love marshmallows and I really want to eat it.”

Or, knowing that “if I just wait, I can get two.” And you really just see it play out on these kids faces. And I'm sure it was playing out on your face last night..

Dan: 03:29 Yeah, I mean these kids are picking up the marshmallows and just like, “maybe if I just caress it a little bit, maybe if I just kind of smell it, if I smell the marshmallow” ... And I guess, as we grow into adults, some of us grow into adults, we learn to be a bit less expressive about it. But like what you've just described about the anguish on these kids faces, is exactly what I felt on the couch last night.

That I was kind of ... I was at this juncture. I could see both paths playing out ahead of me, and objectively, I knew which the right path was, and what did I say to the objectively right path? Fuck you, I'll sort it out tomorrow.

Mel: 04:00 So, the thing for me about temporal discounting, which makes it really interesting as a heuristic, compared to the others is that, when we've talked about most of the other heuristics, we emphasise this element of uncertainty and being drawn towards making the emotional decision at the moment. And then afterwards, we can think of what the more rational decision is.

With temporal discounting, we actually have two options in front of us. We have the clear emotional choice, and we have the more rational choice. And we have the opportunity to really have some certainly about what the rational choice is, and yet, we still fall victim to making the emotional, bad decision.

Dan: 04:34 Yeah, I mean this is one of those ones, where you are literally watching the car crash happen in real time. So you're standing there, you've got the dessert menu in front of you at a restaurant, or the sneakers in front of you at the store. And you literally can feel the little devil and the little angel on your shoulders telling you what to do. And you have this internal dialogue about, I know what's right, I know what I want to do, I know what I should do. And, for some reason, over and over again, we seem to pick the right short term thing, knowing it is probably the wrong medium to long term thing.

Mel: 05:05 So one of the reasons that we do this, and one of the theories that underlies is from a psychological perspective, is the idea of unrealistic optimism. And a lot of people have probably heard of this as well. Which is that, if we actually are a mentally healthy person, we have this sense where everything is going to be okay in the future.

In fact, we think more so that good things are more likely to happen to us, than bad. And, we just tend to think that everything's going to be okay. It's what drives our behaviour now, thinking that everything will be okay in the future.

And so, you're sitting there with your tub of ice cream thinking, “future Dan will be just fine, he's not going to be this 150 kilo mammoth.”

Dan: 05:42 No, no, he's gonna work this out. He's going to exercise like nobody's business.

Mel: 05:47 Because future Dan is awesome, right? He's ... and unrealistically, so.

Dan: 05:52 Excuse me. Future Dan's six pack is currently carving itself as we speak. And future Dan's superannuation fund is also stacking up to the sky.

Mel: 06:01 So it's very easy to imagine good circumstances happening to future Dan. So much so, that we figure, future Dan's going to be fine. Discount future Dan, because he's just going to be alright. And let's focus on what we can have here and now.

Dan: 06:13 Yep. I guess that that makes sense. Like that's one pretty good reason why we would prioritise the here and now over the future. I guess, the other reason that feels like it would make sense, is because, historically, having a future to worry about, is a pretty new thing. For a long part of our existence, life expectancy was around about 25.

Mel: 06:33 Going back a long way, but yeah.

Dan: 06:35 Going back a long way, but you know, in the context of the universe. Evolution is a slow process. It makes sense that we would have evolved to prioritise the here and now, because in the future, either everything going to be sweet, or we're going to be dead anyway, so what's the point.

Mel: 06:47 Sure, you could get attacked by a bear at anytime.

Dan: 06:48 It's true. Dead with a six pack, dead with a keg. Doesn't make a difference, dead anyway.

Mel: 06:53 So what we find though, and going back to the marshmallow experiment, now what actually happened when they followed these kids up over time, was that it turns out, that the kids who are able to delay the gratification, and actually hold out and wait until they could receive the two marshmallows, turned out to do better than other kids on a whole bunch of different outcomes that are good for us.

So in terms of health outcomes, in terms of wealth outcomes, in terms of everything that we think is good for us, the ability to delay gratification and resist the impulse to eat the marshmallow now, played out much further down the track.

Dan: 07:26 So I guess what that means for us is, just humans trying to get by in the world, is if we can train ourselves to get better at foregoing instant gratification, in the hope of some future, bigger, better gratification, that's going to work out pretty well? Is that a fair thing to say?

Mel: 07:42 I think that's the idea.

Dan: 07:43 And I think, ooh, I feel a parenting tip coming on. Kops, do we have any parenting tip music?

Okay, that'll do. As parents, we decide what we teach our kids to value, and so, you know, looking at what happened with these kids in the marshmallow experiment, obviously we want our kids to be two marshmallow kids, not one marshmallow kid. Eve though they're doubling their calorific intake. But that's a whole separate issue.

But, as parents teaching our kids what to value, it seems to me that it would make sense to teach kids to value things in the future, and to value delaying gratification now for things in the future, rather than to value getting whatever you want, right here, right now.

End parenting tip.

Mel: 08:25 So, now that we have a pretty good understanding of what temporal discounting is, and how it works. Let's turn it into the practical side of things.

Dan: 08:34 All right, awesome. So my time to shine, right?

Mel: 08:36 If you say so.

Dan: 08:38 Currently shining.

So, there's some really interesting implications in this for marketers. So the first and the easiest one to look at is, if you happen to look after a product, or a service that has short term benefits for people. Like is a short term or impulsive type product, then, absolutely lean into that. Knowing that we are hardwired to prioritise benefits right here, right now, over things in the future.

Mel: 09:05 Right, I was going to say like if we have an emotional need, that needs to be satisfied right now-

Dan: 09:09 Yeah.

Mel: 09:09 And you've got a product that can service that need. Go all out.

Dan: 09:13 Exactly. So if you've got a snack food designed for people who are hungry. You know if I think about Maslow's hierarchy of needs. So somebody trying to fil a bottom order need, get some food in their stomach. Trying to talk to them about how the chocolate bar is going to help you self-actualize, it's going to be a tough battle, right?

Instead, you should focus on some things that treats the here and now. And when you look at confectionary, you know chocolate bars that have succeeded globally for long periods of time, like this is exactly what they do.

Snickers is my favourite example. It's also one of my favourite chocolate bars, but ... snickers really satisfies. It's not talking to you about world peace, it's not talking to you about sustainable farming, it's not talking to you about saving for retirement. It's like, “you are hungry now, put this in your face, you will feel better.”

Mel: 09:56 So the contrast to this. And I think ... it makes me think about industries where this is particularly relevant. Where the concept of time is really important to them. So things like insurance companies, superannuation companies - industries where everything, the product is all about the future. And the future is uncertain.

Understanding how temporal discounting works for the consumer is really important, because you're trying to sell people on sometimes that really is not of any instant need to them right now.

Dan: 10:22 Yeah. I mean this is really tough. And a lot of the big industries that all of us work in, are in exactly this space. And even within those industries, I think there's two categories. So you've got guys like banks and universities, who often are selling something long term, but it's a positive. So it's like, well, you're going to pay off your house for 30 years, but then you're going to own it. Or, you're going to come and study for four years, and then you're going to have this degree and this wonderful career ahead of you.

But then you've also got guys like insurance companies, who are not only selling long terms things, but they're selling long term, negative, uncertain things. Like here's a product for you. Like don't spend 120 dollars going out this month. Spend 120 dollars protecting you in the future, in case something really bad happens, and you're going to need to go to the hospital, or something like that.

Mel: 11:06 And unrealistic optimism tell us that the chances of that happening to us, are so slim anyway.

Dan: 11:10 Ah no, I don't go to hospitals. That's for other people.

Mel: 11:13 Never. Other people go to hospitals. It will never happen to me. It's also worth noting that we're actually so bad at falling victim to temporal discounting, that we actually have to be protected from it, by way of forced superannuation. So we're so bad at putting money aside for our future, that the government has actually forced us to do it.

Dan: 11:30 Yeah. So, we've seen some degree of that happen with health insurance as well, where the government basically penalises you for not taking out health insurance. But even then, if you're in education or even if you are in health insurance, there are some things that you can do, to help overcome temporal discounting.

So, I mean, one of the things is to take a very, very hazy future state. You know if you're a bank, thinking about the home that somebody might own one day if they save enough. Or the holiday they might get to take. And make it less hazy. Make it more concrete. Give people something firm that they can actually hook themselves onto. Because there's been some interesting studies that suggest that, if were trying to delay gratification for a known thing, we're much better at doing that, than delaying gratification for an unknown thing.

Mel: 12:13 Yeah. So a good example is if you think about planning for a holiday. And you think that people are actually willing to spend money on a holiday that might happen in the future. The outcome is fairly certain, right? Our future holiday is going to be something that we can be pretty certain that we're going to enjoy as well.

And what you find is that people are willing to do that, because they know that not only do they get to enjoy the experience of purchasing a holiday, but they then get to enjoy the next three, four, five, six, twelve months of actually leading up. The anticipation of the holiday, is often better than the enjoyment of the actually holiday itself.

Dan: 12:48 Absolutely. I think another really cute example of this, is some research done ... I'm pretty sure it was Dan Ariely, one of my other giant man crushes. He's not giant. The crush is giant. But, he did a ... I think he did some research into if people had the opportunity to meet their celebrity crush, if they'd rather meet them this afternoon, or if they'd rather meet them in three days time. And most people would prefer to meet them in three days time because it's a fixed thing. You're going to get to meet them today or in three days time. But, if it's in three days time, you also get to enjoy the anticipation and the lead up and thinking about it for that period, which adds to an overall greater happiness experience.

Mel: 13:26 So, bottom line, anything that we can do to make something that is potentially uncertain in the future, seem closer in time, and more certain, is going to benefit.

Dan: 13:35 Yeah. And the other thing we can do as far as making things closer in time, is to try and find interim goals that people can get. So if your university's selling education, talking about the career you're going to have in 30 years, is great maybe. But talking about what you're going to know at the end of your first semester, or what transfer options, or further education options would be available to you at the end of your first year, would also be great.

Similarly, if you're a bank trying to chase down new customers, helping people understand, if they sign up today, what do they get tonight. What benefits do they unlock? What status or rewards or offers can they have today to help satiate that need to get to a future benefit that may or may not arrive.

You also see a lot of health insurance companies do this, by bundling in rewards programmes. Where, even if you never actually claim on your health insurance, you can get discounted sneakers, or entry into gyms and things like that, just for signing up.

All right Mel, super quick summary. What have we learnt today?

Mel: 14:32 Well we learnt that as a consumer, we're going to be highly vulnerable to making decisions that result in us receiving something right here, right now. But long term, may not be in our best interest.

Dan: 14:43 And is there anything we can do about that?

Mel: 14:45 Well there is ... we can, if we are aware of it, then we can potentially train ourselves to delay reward, and resist that impulse.

Dan: 14:54 Or we can rely on the government to put in policies that force us to focus on the future rather than the here and now.

Mel: 15:00 Cool.

Dan: 15:01 I guess if we’re selling stuff that is meant to fulfil short term needs, then go, pedal to the metal, hammer that wherever we can. If we're selling things that are more about long term planning, long term goals, we've got to find ways to make things less hazy. Make them clearer. And also find some short term interim goals or benefits that we can help people enjoy.

Is that everything?

Mel: 15:19 I think so.

Dan: 15:21 All right. Hey, this is good, it was good. I'm glad we got to talk about temporal discounting.

Mel: 15:25 Yeah, I mean, it's about time.

Dan: 15:30 Oh wow, that's bad.

Mel: 15:32 Yeah, I did.

Dan: 15:33 Was that a doctor joke? Was that psyche joke?

Mel: 15:36 All right, if you guys have any questions for us, please find us on social media.

Dan: 15:40 Not just questions, what about feedback? Can we have feedback?

Mel: 15:42 Feedback's great. Yeah we love feedback.

Dan: 15:42 We love getting feedback.

Mel: 15:43 Only if it's good though.

Dan: 15:44 If it's good send it to me. And hey, keep listening. We have so many more bad decisions to unpack, so make sure you come and check out the next episode. It's going to drop two weeks from now. See ya!

Dan: 16:13 I think doctor jokes are worse than dad jokes.

Mel: 16:16 I think we're finished here.