Understand Temporal Discounting to Make Better Career Decisions
Would you rather have an apple today or two apples tomorrow?
If I give you this choice, you’ll probably start thinking about how much you like apples, how hungry you are right now, and what your meal schedule looks like today. It’s tricky, isn’t it?
If I offer you a slight variation of this choice, however, you’ll immediately know your preference: Would you rather have an apple in a year or two apples in a year and one day? That one is obvious.
Why is it that one of these feels difficult, while the other one feels easy? The premise is identical: Wait one more day, get 100% more apples.
The answer lies in a concept called temporal discounting, which, while almost irrelevant in the apples example, can have a great impact on your life — specifically your career.
Temporal discounting means you take time into account when you consider how attractive rewards are. $1,000 today is better than $1,000 in one year, and so we’re willing take a discount on a future reward if we can receive it earlier. The question is do we let the discount ruin our long-term decisions?
Nobel prize winner Richard Thaler first researched temporal discounting in 1981. He gave students a hypothetical lottery win with an increased payout if they waited to pick it up. How much money would they require for it to be worth waiting a month, a year, or even ten years to collect?
Thaler found two deciding factors: The size of the reward and the length of time people must wait.
For example, if the reward was $15, the students wanted $60 if they had to wait a year. If today’s reward was $3,000, they only asked for 33% more for having to wait 12 months. That’s because $15 won’t get you very far but an extra $1,000 will — the wait is less painful if the absolute payoff is high.
Thaler concluded that “people get the big decisions right,” but he also found that with regard to length, our reasoning capabilities fall apart.
The gap between today and tomorrow feels much more important than the gap between December 4, 2022, and December 5, even though they are the same. We also suck at estimating exponential math functions, which is what correctly determining the future value of something requires. Compared with how much they asked for to wait a year, people asked for too little to wait ten.
Thaler believed these judgmental errors wouldn’t matter much in the short term, but that they had a “pronounced impact” on the ten-year time frame — which is the kind of interval we must consider when choosing our careers.
Chris Dixon is a partner at Andreessen Horowitz. In an article titled “Climbing the wrong hill,” he tries to answer the question, “How can smart, ambitious people stay working in an area where they have no long term ambitions?”
Dixon mentions an investment banker who hated his job and decided to quit so he could launch his own startup. After he gave his notice, his bosses lured him into staying with more pay and responsibility, even though he had no interest in finance in the long run.
I’m sure you too can think of an example where you let the short-term allure of a less than optimal career choice trick you into working more on something you had no desire in sustaining. As Dixon writes:
People tend to systematically overvalue near term over long term rewards. This effect seems to be even stronger in more ambitious people. Their ambition seems to make it hard for them to forgo the nearby upward step.
Our career choices are some of the most important ones we’ll ever make, and yet, because their reward — having enjoyed our career in hindsight — is far away, we can no longer do the math. That’s a tragedy in the making.
Fortunately, Dixon does not come empty-handed. His solution? More math, of course. Hill climbing is a common problem where, in an unknown terrain with hills of varying height, you’re trying to find and scale the highest one.
Different algorithms exist to solve this problem, but the simplest one of “take me one step in the next-highest direction” won’t do the trick. It’ll lead you up the first mountain, not necessarily the highest. You need some randomness built into the system, Dixon claims, but, most of all, you need to abandon your current hill as soon as you discover there’s a higher one to be climbed.
In our careers, the view of the terrain becomes clearer with each passing day, and yet, we keep climbing the wrong hills. Back to his example, Dixon says:
He knows he wants to end up at the top of a different hill than he is presently climbing. He can see that higher hill from where he stands. But the lure of the current hill is strong. There is a natural human tendency to make the next step an upward one.
Investor and former Y Combinator president Sam Altman calls this “the deferred life plan,” which he explains as follows:
People who say some version of the following sentence: “My life’s work is to build rockets. So what I’m going to do is make $100 million in the next four years trading cryptocurrency with my hedge fund because I don’t want to think about the money problem anymore, and then I’m gonna build rockets.” And they never do either.
“If these people would just pick one thing or the other, but with a long enough time horizon, they would succeed at either,” Altman believes. Trapped by temporal discounting.
“One of the many problems with the deferred life plan is everyone can kind of tell that that’s what you’re on,” he says. People won’t root for you if they can see you’re not in it for the right reasons — and if you’re trying to do something big, having as much support as you can get is important.
Another is that you’ll be fooling yourself, and even though, as Richard Feynman said, “you’re the easiest person to fool,” it is imperative that you don’t. “Maybe, it means you have to be an employee at SpaceX instead of Elon Musk, but at least you’ll be doing what you want,” Altman suggests.
Don’t discount your future. Don’t overestimate today’s bonus check compared to your long-term career satisfaction, and don’t underestimate what you can do with enough time if you’re focused on something you truly care about.
It’s hard enough to find a career path you know you’ll genuinely enjoy. Don’t rob yourself of even a second on that path once you’ve discovered it. “When you find the highest hill, don’t waste any more time on the current hill no matter how much better the next step up might appear,” Dixon says.
Your career is not a fruit basket, but even if it was, an extra apple would never beat knowing it was the right achievement you received the basket for. And besides, if you can win a Nobel prize by picking the right hill, who gives a damn about fruit?