Hyperbolic discounting describes an inconsistent reasoning vs logic regarding future events.
It is based on the empiric evidence that humans perceive a higher margin cost of near term delay compared to the same absolute difference in timedelay further out in time.
The same hyperbolic discounting behaviour can be observed when it comes to risk assessments over time. A behaviour that may not incur a lot of risk over a short time, but where the same behaviour accumulates risk over a longer time frame, may be perceived as an overall low risk due to the shortterm perception impact.
This hyperbolic discounting phenomena can be observed daily in various contexts; food consumption, risky behaviour, etc
If we look at financial markets, the behaviour since the financial markets from politicians and centralbankers is very much in line with the parabolic discounting function. It also corresponds well to the Nobel Price Winner Daniel Kahnemann´s theories of how the decision making mechanisms in the human brain works. Picking the easiest solutions first, even if they may not be the wisest or logical ones.
The phenomena described above is a function of human DNA and democracy. As the electorate as a group will act in line with the biases of human DNA, so will the politicians (they want to get reelected) and hence, centralbankers (even if they are "independent" it doesn´t mean they will risk trying something that may throw the out of office due to impopularity).
The current macro and centralbank environment combined with the ongoing regulation is in my view an outcome of hyperbolic discounting behaviour combined with an unawareness of the analytical bias for picking the easiest short term solutions á la Kahnemann.
It carries a disregard for the longer term accumulation of risks, especially in terms of the very unfortunate mix of record macro imbalances, record global debt, fixed exchange rates and central governance of the largest country(population) in the world. On top of it, we´ve had the ongoing regulations drastically reducing systemic risk absorption capacity while increasing procyclicality.
The consequence is a drastic increase in digital asset volatility risk, and a weaker financial system. Already effecting the real economy.
The upside is that asset volatilites are undervalued given the longer term consequences stemming from the ongoing risk accumulation.
The outcome of the above described development is an economic environment with an increased level of non linearity and convexity risk profile attached to it. In order to adapt to this changing risk environment, organizations will have to apply non linear risk thinking approaches and instruments.
The ones who do will not only increase their probability of survival, they will also generate a competitive advantage to their market.
This is in itself a good incentive as any to shift the financial risk management infrastructure within financai institutions and corporates - today.
The resistance to necessary adaption rests solely on the organization itself. Education, know how and experience will help in this process. Boards now have to adapt and be willing to make the necessary changes.
It doesn´t matter how much focus there is on the core business, if margins diappear because of unwillingness to adapt the risk management structure to a new environment. It´s up to you. The problem is not external, it´s internal.
