Hyperbolic Discounting and New Release Movies

In economics, discounting refers to the way that you reduce the value of future costs and benefits. In the simplest example, $1 today is worth more than $1 in one year’s time. The reason for this is that I can earn interest on that dollar over the year. So if the interest rate is 4%, then the value of $1 in a year is $1 / 1.04.

When you discount things at a constant continuous rate, this is called exponential discounting. The value of $1 at time t when the interest rate is r is equal to exp(-r*t).

Hyperbolic discounting refers to the tendency to apply very high discount rates for the short term, and lower discount rates in the long term. Which is a fancy way of saying that people are very impatient for things they could get right now, but more patient when the thing isn't going to arrive for a while anyway. It’s irrational, because it leads to preference reversals.

For instance, if you ask people whether they’d prefer to receive $10 in one year’s time or $11 in one year and one day, most people pick the $11. But if you ask them whether they’d like to receive $10 right this instant or $11 tomorrow, more people will pick the $10. Implicitly, the value they place on waiting for the first day is much higher than the value they place on waiting for the 366^th day. But this leads to reversals. Take the guy who picked the $11 in one year and one day. Now fast forward 365 days. He’s now going to wish he’d taken the $10/one year option, because that’s what he wants when the choices are between the immediate and the one day delay. Hence he changes his mind.

(For a good example for the econ-minded, Stefano DellaVigna and Ulrike Malmendier have a great paper on gym memberships. They argue that hyperbolic discounting explains why people sign up for monthly and annual gym memberships and end up paying much more than if they'd paid for each visit).

To my mind, there’s loads of cases where people apply hyperbolic discounting, and they really can’t stand waiting. But let me give you one that stands out for people applying ridiculous short term discount rates – new release movies.

It’s amazing the amount of @#$% people will go through in order to see a movie on its opening weekend, or even worse, on opening night. They’ll line up for hours. They’ll sit in the second row and get neck spasms. They’ll sit in a packed theatre, knowing that there’s a good chance there’ll be someone in the seat in front of them at least partially blocking their view. And if you’re seeing it on opening night, you have to suffer double the indignity of spending your three hours in line next to losers dressed up in Harry Potter outfits, and reflecting how you apparently have similar tastes and preferences in life.

And for what? It’s the same movie that you can see 3 weeks later with no line, in a pleasantly empty theatre. I can understand it if’s a mystery movie where someone might spoil the ending. But how the hell does that explain Cheaper By the Dozen 2? Are people worried that their friends will spoil the enjoyment of the nuanced plotlines by giving them spoilers?

My best guess is hyperbolic discounting – when something is the latest new craze, people want to see it NOW! The alternative (which I also find plausible) is that most of the value of a movie is either a) sharing the excitement with people who’ve just seen it,  or b) signaling to your peers that you’re one of those cool people who sees things as soon as they come out.

Shylock says – lame.

The good news is that hyperbolic discounting can be overcome. You know how?

Think your way to better decisions.