LifestylePsychologyRisks and Mistakes

What is hyperbolic devaluation and how does it affect your financial decisions?

Hyperbolic devaluation is one of the psychological factors coming with evaluation which was necessary for the survival in the case of ancient people but is rather tricky in the modern life. Because of this issue, even the people with the best financial skills might still be prone to make poor financial decisions. Here, you will find everything you need to know about this phenomenon as well as the way you can deal with it to protect yourself from excessive expenses.

The value of financial stability in the future

Hyperbolic devaluation is related to our perception of the value of money within time. The simplest example is an offer of money which one can receive either right now or in a year. If one chooses the money right now, the sum will be equal to one hundred dollars whereas in a year one can get two hundred dollars.

The typical behaviour of humans is to choose the reward which will be paid to them right now rather than wait for a larger one which will be paid in the future. At the same time, people are ready to wait ten years for two hundreds of dollars instead of receiving one hundred dollar in nine years.

Such decisions are connected to the way people are perceiving the value of things with time. In the first case, there is a possibility to receive a reward right now and people are more willing to do it as the future reward does not seem thus valuable even though in the reality the sum is twice larger. At the same time, waiting for a longer time for both types of rewards allow people to look at the perspective more rationally. As a result, the majority of them are ready to wait ten years instead of nine for their reward.

How is it working in practice?

There is a huge number of examples of the irrational financial decisions made by different people including those who have real difficulties with managing their budget as well as those who are really good at it.

A typical illustration is borrowing money for purchasing something which is not necessary for people right now. In fact, this psychological preprograming happens in various areas of life and is not necessarily limited to finances. Anytime a person chooses pleasure right now over stability and safety in the future is the result of the same mechanism working. For instance, indulging into unhealthy food with a whole understanding of its long-time effect. No matter how one wants to be healthy in the future, the reward for it does not seem thus attractive as the pleasure coming with consuming something delicious right away.

Why is it happening to people and what can be done about that?

One of the most possible explanations for such a behaviour of people is the evolution. Ancient people living in the natural environment did not have to make the decisions modern people make every day. Once they saw a skinny deer during hunting, it would be very senseless for them to wait for a large one to come and leave the first one go without trying to catch it. Only in such a way, people were able to survive.

As you can imagine, this is not working like this in the modern world where people have to make lots of decisions requiring considering the future.

The only way you can deal with this psychological factor is to keep a vision of yourself in the future and focus on the things which are important for him or her.

In case it is particularly difficult for you to resign from unnecessary purchases or pricey entertainment, you can use such tools as limits for using your bankcard or automated savings. It might also be sensible to report your expenses to another person.

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