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Uncertainty and Hyperbolic Discounting

  • Partha Dasgupta
  • Eric Maskin

We propose an evolutionary explanation for the pattern of intertemporal preference reversals often ascribed to "hyperbolic discounting." We take the view that preferences—manifested, for example, in urges, cravings, and inclinations— are the outcome of evolutionary forces, and so will induce animals or humans to make survival-maximizing choices in "typical" decision problems. We show that if the typical problem involves payoffs whose realization times are uncertain, then optimal preferences give rise to relatively patient behavior when the time horizon is long but induce a switch to impatience when the horizon grows short. Such reversals do not entail dynamic inconsistency in typical decision problems; behavior there is optimal. However, if a decision-maker is confronted with a choice for which the realization-time uncertainty falls outside the evolutionary norm, her preferences may well prompt her to behave inconsistently. We argue that, if such a choice problem recurs, her evolutionarily endowed aability to learn will lead her to make self-commitments against these urges.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 4 (September)
Pages: 1290-1299

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:4:p:1290-1299
Note: DOI: 10.1257/0002828054825637
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  1. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-54, May.
  2. Rubinstein, Ariel, 2001. "A theorist's view of experiments," European Economic Review, Elsevier, vol. 45(4-6), pages 615-628, May.
  3. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  5. Swinkels, Jeroen M. & Samuelson, Larry, 2006. "Information, evolution and utility," Theoretical Economics, Econometric Society, vol. 1(1), pages 119-142, March.
  6. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
  7. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
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