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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Other versions of this item:
- J. Doyne Farmer & John Geanakoplos, 2009. "Hyperbolic Discounting Is Rational: Valuing the Far Future with Uncertain Discount Rates," Cowles Foundation Discussion Papers 1719, Cowles Foundation for Research in Economics, Yale University.
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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:
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- Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00657038, HAL.
- Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Documents de travail du Centre d'Economie de la Sorbonne 10012, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Eric Crampton & Matt Burgess & Brad Taylor, 2011. "The Cost of Cost Studies," Working Papers in Economics 11/29, University of Canterbury, Department of Economics and Finance.
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