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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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1719.
Length: 17 pages
Date of creation: Aug 2009
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- J. Doyne Farmer & John Geanakoplos, 2009. "Hyperbolic discounting is rational: Valuing the far future with uncertain discount rates," Levine's Working Paper Archive 814577000000000356, David K. Levine.
- 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-2009-08-16 (All new papers)
- NEP-ENV-2009-08-16 (Environmental Economics)
- NEP-NEU-2009-08-16 (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
- Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Discounting when income is stochastic and climate change policies," MPRA Paper 27998, University Library of Munich, Germany.
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- 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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