Hyperbolic discounting gets us into trouble because it makes us more likely to delay settling debt, thereby incurring high interest charges. Silvia Razgova / The National
Hyperbolic discounting gets us into trouble because it makes us more likely to delay settling debt, thereby incurring high interest charges. Silvia Razgova / The National
Hyperbolic discounting gets us into trouble because it makes us more likely to delay settling debt, thereby incurring high interest charges. Silvia Razgova / The National
Hyperbolic discounting gets us into trouble because it makes us more likely to delay settling debt, thereby incurring high interest charges. Silvia Razgova / The National

Borrowing in the present means payback in future


Omar Al Ubaydli
  • English
  • Arabic

The UAE offers economic opportunities to the rich and poor. For those with modest means, trying to move up the ladder often requires incurring substantial debt at the outset. That is why, according to one recent estimate, the average UAE resident owes creditors Dh41,000.

A mixture of poor planning and bad fortune mean that for a subset, the debt becomes unmanageable. The National's online Debt Panel is replete with letters from distressed borrowers searching for a way out of debt cycles; what is that makes humans so prone to these difficult episodes?

There are two main psychological phenomena that get us into trouble: hyperbolic discounting, and the good news-bad news effect.

It is human nature to exhibit a preference for consuming things in the present rather than the future; this is described as discounting the future. To understand hyperbolic discounting, which is a cognitive bias that is useful to economists trying to understand personal debt problems, we first have to grasp its simpler antecedent, exponential discounting.

When you make a choice that involves a future act, absent the arrival of any new, relevant information, when that future time arrives, you should stick to what you planned to do. This is known as exponential discounting of the future, and someone conforming to it is being dynamically consistent. Thus, if you set your alarm to 6am because you want to get up at 6am, when it rings, you get up.

If that sounds implausible, then that’s because in practice, you are more likely to be a hyperbolic discounter of the future, or a dynamically inconsistent decision-maker. That means that you succumb to an additional dose of discounting when the future time comes around, and critically, it is an additional dose that you can work around only imperfectly. No matter how many times you tell yourself that you will wake up at 6am tomorrow because it is in your interest to rise at that time, when the alarm finally rings, the bed seems extra warm, and your plans for the rest of the day seem less important than you anticipated that they would feel last night.

Understanding this propensity is important for the study of personal debt because borrowing is all about how people value current versus future consumption. Hyperbolic discounting gets us into trouble because it makes us more likely to delay settling debt, thereby incurring high interest charges, as we are unable to stick to the repayment plan that we envision at the point of taking out the loan.

Fortunately for humans in a wide variety of contexts, economists have shown that we possess the capability to diagnose and counteract our cognitive biases, especially under repeated exposure to the decision.

For example, the endowment effect is a cognitive bias that makes us place an irrationally high value on our possessions. Think of how much you would need to be paid to surrender your pen – a figure that typically far exceeds the price of a brand new one. But empirical research shows that professional traders do not suffer from the endowment effect, due to the massive cumulative experience of surrendering their possessions, just as nurses do not grimace at the sight of blood.

Unfortunately for humans, in the personal debt domain, for several reasons we struggle to overcome hyperbolic discounting.

First, in the context of large loans, they are so infrequent that one doesn’t acquire the necessary experience in dealing with one’s cognitive deficiencies. Regular visitors to Las Vegas have often learnt to better control themselves with time, but most people take out at most one mortgage, which is not enough to get good at managing the process.

Second, even with higher frequency loans, such as credit card bills, humans’ efforts at learning from experience are impaired by another cognitive bias, referred to as the “good news-bad news effect”: people are much better at learning from experience which says something good about them than that which casts them in a bad light.

To see this more clearly, returning to the endowment effect example, discovering that you suffer from an irrational attachment to your possessions is not necessarily bad news; in fact, people may even regard you as charming and sentimental. In contrast, learning that you are bad at managing your debt is an unwelcome development, as most would associate it with poor self-control – an unquestionably negative character trait.

To maintain your self-esteem, your brain will often trick you into paying little attention to bad news, or erroneously attribute it to external factors beyond your control; think of athletes blaming a loss on the referee, the weather, the crowd – anything except their lack of preparation and ability. This impairs the improvement process.

To make matters worse, wily companies also take advantage of this; there is an abundance of unscrupulous creditors who excel at exploiting cognitive biases such as hyperbolic discounting. Payday loan sharks are a prominent example.

If you fear that you are prone to such dangers and are searching for tricks that can help you avoid falling into debt traps, then look no further than Odysseus’ 3,000-year-old strategy for resisting the temptation of the sirens: take preemptive actions that prevent you from making a potentially harmful future choice.

The modern analogue to tying yourself to the mast of your ship is subscribing to savings plans that automatically lock off part of your earnings, using credit cards with tight limits and that require full repayment each month, or exclusively using debit cards so that you only spend what you already have.

Whichever steps you take, make room for regular recitation of personal finance guru Nathan Morris’s leading maxim: “Every time you borrow money, you’re robbing your future self.”

Omar Al Ubaydli is the programme director for international and geopolitical studies at the Bahrain Center for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University in the US.

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BMW M5 specs

Engine: 4.4-litre twin-turbo V-8 petrol enging with additional electric motor

Power: 727hp

Torque: 1,000Nm

Transmission: 8-speed auto

Fuel consumption: 10.6L/100km

On sale: Now

Price: From Dh650,000

The design

The protective shell is covered in solar panels to make use of light and produce energy. This will drastically reduce energy loss.

More than 80 per cent of the energy consumed by the French pavilion will be produced by the sun.

The architecture will control light sources to provide a highly insulated and airtight building.

The forecourt is protected from the sun and the plants will refresh the inner spaces.

A micro water treatment plant will recycle used water to supply the irrigation for the plants and to flush the toilets. This will reduce the pavilion’s need for fresh water by 30 per cent.

Energy-saving equipment will be used for all lighting and projections.

Beyond its use for the expo, the pavilion will be easy to dismantle and reuse the material.

Some elements of the metal frame can be prefabricated in a factory.

 From architects to sound technicians and construction companies, a group of experts from 10 companies have created the pavilion.

Work will begin in May; the first stone will be laid in Dubai in the second quarter of 2019. 

Construction of the pavilion will take 17 months from May 2019 to September 2020.

THE LIGHT

Director: Tom Tykwer

Starring: Tala Al Deen, Nicolette Krebitz, Lars Eidinger

Rating: 3/5

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A cryptocurrency primer for beginners

Cryptocurrency Investing  for Dummies – by Kiana Danial 

There are several primers for investing in cryptocurrencies available online, including e-books written by people whose credentials fall apart on the second page of your preferred search engine. 

Ms Danial is a finance coach and former currency analyst who writes for Nasdaq. Her broad-strokes primer (2019) breaks down investing in cryptocurrency into baby steps, while explaining the terms and technologies involved.

Although cryptocurrencies are a fast evolving world, this  book offers a good insight into the game as well as providing some basic tips, strategies and warning signs.

Begin your cryptocurrency journey here. 

Available at Magrudy’s , Dh104 

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At a glance - Zayed Sustainability Prize 2020

Launched: 2008

Categories: Health, energy, water, food, global high schools

Prize: Dh2.2 million (Dh360,000 for global high schools category)

Winners’ announcement: Monday, January 13

 

Impact in numbers

335 million people positively impacted by projects

430,000 jobs created

10 million people given access to clean and affordable drinking water

50 million homes powered by renewable energy

6.5 billion litres of water saved

26 million school children given solar lighting

57%20Seconds
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Company%20profile
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The specs

Engine: 2-litre 4-cylinder and 3.6-litre 6-cylinder

Power: 220 and 280 horsepower

Torque: 350 and 360Nm

Transmission: eight-speed automatic

Price: from Dh136,521 VAT and Dh166,464 VAT 

On sale: now

MATCH INFO

CAF Champions League semi-finals first-leg fixtures

Tuesday:

Primeiro Agosto (ANG) v Esperance (TUN) (8pm UAE)
Al Ahly (EGY) v Entente Setif (ALG) (11PM)

Second legs:

October 23

ELIO

Starring: Yonas Kibreab, Zoe Saldana, Brad Garrett

Directors: Madeline Sharafian, Domee Shi, Adrian Molina

Rating: 4/5

Defence review at a glance

• Increase defence spending to 2.5% of GDP by 2027 but given “turbulent times it may be necessary to go faster”

• Prioritise a shift towards working with AI and autonomous systems

• Invest in the resilience of military space systems.

• Number of active reserves should be increased by 20%

• More F-35 fighter jets required in the next decade

• New “hybrid Navy” with AUKUS submarines and autonomous vessels

Seemar’s top six for the Dubai World Cup Carnival:

1. Reynaldothewizard
2. North America
3. Raven’s Corner
4. Hawkesbury
5. New Maharajah
6. Secret Ambition

Key facilities
  • Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
  • Premier League-standard football pitch
  • 400m Olympic running track
  • NBA-spec basketball court with auditorium
  • 600-seat auditorium
  • Spaces for historical and cultural exploration
  • An elevated football field that doubles as a helipad
  • Specialist robotics and science laboratories
  • AR and VR-enabled learning centres
  • Disruption Lab and Research Centre for developing entrepreneurial skills
The biog

Name: Salvador Toriano Jr

Age: 59

From: Laguna, The Philippines

Favourite dish: Seabass or Fish and Chips

Hobbies: When he’s not in the restaurant, he still likes to cook, along with walking and meeting up with friends.

Why your domicile status is important

Your UK residence status is assessed using the statutory residence test. While your residence status – ie where you live - is assessed every year, your domicile status is assessed over your lifetime.

Your domicile of origin generally comes from your parents and if your parents were not married, then it is decided by your father. Your domicile is generally the country your father considered his permanent home when you were born. 

UK residents who have their permanent home ("domicile") outside the UK may not have to pay UK tax on foreign income. For example, they do not pay tax on foreign income or gains if they are less than £2,000 in the tax year and do not transfer that gain to a UK bank account.

A UK-domiciled person, however, is liable for UK tax on their worldwide income and gains when they are resident in the UK.

MOUNTAINHEAD REVIEW

Starring: Ramy Youssef, Steve Carell, Jason Schwartzman

Director: Jesse Armstrong

Rating: 3.5/5

Match info

Costa Rica 0

Serbia 1
Kolarov (56')

Warlight,
Michael Ondaatje, Knopf 

Honeymoonish
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RESULTS

1.45pm: Maiden Dh75,000 1,400m
Winner: Dirilis Ertugrul, Fabrice Veron (jockey), Ismail Mohammed (trainer)
2.15pm: Handicap Dh90,000 1,400m
Winner: Kidd Malibu, Sandro Paiva, Musabah Al Muhairi
2.45pm: Maiden Dh75,000 1,000m
Winner: Raakezz, Tadhg O’Shea, Nicholas Bachalard
3.15pm: Handicap Dh105,000 1,200m
Winner: Au Couer, Sean Kirrane, Satish Seemar
3.45pm: Maiden Dh75,000 1,600m
Winner: Rayig, Pat Dobbs, Doug Watson
4.15pm: Handicap Dh105,000 1,600m
Winner: Chiefdom, Royston Ffrench, Salem bin Ghadayer
4.45pm: Handicap Dh80,000 1,800m
Winner: King’s Shadow, Richard Mullen, Satish Seemar

It Was Just an Accident

Director: Jafar Panahi

Stars: Vahid Mobasseri, Mariam Afshari, Ebrahim Azizi, Hadis Pakbaten, Majid Panahi, Mohamad Ali Elyasmehr

Rating: 4/5

Sole survivors
  • Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
  • George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
  • Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
  • Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.