Why it is important to wait before spending money for immediate gratification
Some principles are beautiful just as they are uncanny. We love today too much to worry about tomorrow. This is not about a carefree attitude or even the profound idea of living in the present. It is just the simple human wiring that almost always places a high premium on the visible present over the hazy future. Cognitive psychologists have a fancy name for it—hyperbolic discounting. We may be simply incapable of committing to long-term benefits. Worse, we may see the future as plain uncertain and fail to manage it rationally for the risks involved.

Consider some examples. We sign up for annual subscriptions to the gym and fail to turn up after the first few months. We dislike term insurance that requires a premium payment today but no reward in the future, if we stay alive at the end of the term. We love the credit card that enables spending today, even if we pay an an obnoxious amount repaying the dues tomorrow. We delay planning for our retirement, as it seems too far away to bother. We fail to keep up the lifestyle changes even after the frightening diagnosis of disease. Blame it all on hyperbolic discounting—we simply cannot sacrifice something today for a benefit in the distant future; or we willingly trade future benefit for an immediate joy. It is a well-recognised cognitive disorder.

Our limitation is the seller's joy. Marketing mavericks exploit our craving for a benefit today, by cleverly packaging their goods. Buy today, pay later is the oldest trick in the book to increase sales. Even our local grocer knows that offering credit is the surest way to get his customers to buy more. Free gifts, discount sales, lucky draws, early-bird prizes, scratch-to-win contests, buy-one-get-one are all gimmicks that play on the need for immediate gratification.

Subscriptions are framed deceptively, exploiting our tendency for hyperbolic discounting. Your gym told you that they charge `5,000 a month, but are offering you an annual subscription for Rs 30,000. Or a 50% discount. If you choose to pay monthly, since that is a small amount and you can decide as you go along, you end up paying twice the charges (30,000 a year is only 2,500 a month). Some still choose that option as it looks smaller than Rs 30,000. Some others take up the whole year's subscription ( yes, it mostly happens in January, fresh after new year resolution season) and pay up, but only a small percentage of them persist. Heads they win; tails you lose. Worse, you are unable to keep up with the diet and drill, because the immediate benefit of a good time with friends and family seems more precious than the long-term benefit of better fitness. Many fall off the curve as expected.

The twist in the tale when it comes to hyperbolic discounting is about how we get the math wrong. If we were nice and rational, we will all use the principles of time value of money and make meaningful comparisons between today and tomorrow. What we instead do is make this choice about today and tomorrow, but make it with two completely different discounting rates. Typically we use a smaller rate if the benefit is in the future. An example might help here. Assume that you were to choose between Rs 100 today or Rs 150 after a year. It is very likely that you will choose Rs 100 today. Classic case of choosing the present over an unknown future, failing to see the substantial 50% benefit. Assume again that you were to choose between Rs 100 five years later, or Rs 150 six years later.

Framed in this manner, you have to transport yourself into the future before you make a choice. Very likely that you will tell yourself, having waited for five years, one might as well wait a year more and take Rs 150. The truth is, both pairs of payments are only a year apart, and are therefore, not different. You overestimate the Rs 100 today since it comes immediately, but overestimate the Rs 150 in the sixth year since it comes in a distant future. That is what hyperbolic discounting means—the future is hazy in your mind, and you tend to discount it at a lower rate. Or, you have a perceived value in mind that is not mathematically derived.