Hyperbolic discounting

J. Doyne Farmer and John Geanakoplos (2009) – HYPERBOLIC DISCOUNTING IS RATIONAL: VALUING THE FAR FUTURE WITH UNCERTAIN DISCOUNT RATES, Cowles Foundation Discussion Paper No. 1719

“Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.”

Without having yet read the paper, the hypothesis seems reasonable.  I’m convinced that exponential discounting is invalid. A power law function is better, but really using a different discount rate for each period is probably the best fit. The rate for US Treasuries varies over time.

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