Hyperbolic discounting is rational: Valuing the far future with uncertain discount rates
AbstractConventional 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.
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Date of creation: 25 Sep 2009
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- J. Doyne Farmer & John Geanakoplos, 2009. "Hyperbolic Discounting Is Rational: Valuing the Far Future with Uncertain Discount Rates," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1719, Cowles Foundation for Research in Economics, Yale University.
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-03 (All new papers)
- NEP-CBA-2009-10-03 (Central Banking)
- NEP-NEU-2009-10-03 (Neuroeconomics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Is hyperbolic discounting rational?
by Economic Logician in Economic Logic on 2009-09-21 14:54:00
- The sickness of short-term-ism -- it's everywhere
by Mark Buchanan in The Physics of Finance on 2011-07-06 12:36:00
- Deep Discounting Errors?
by Mark Buchanan in The Physics of Finance on 2011-05-28 10:42:00
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