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Complexity and Hyperbolic Discounting

Author

Listed:
  • Benjamin Enke
  • Thomas Graeber
  • Ryan Oprea
  • Thomas W. Graeber

Abstract

A large literature shows that people discount financial rewards hyperbolically instead of exponentially. While discounting of money has been questioned as a measure of time preferences, it continues to be highly relevant in empirical practice and predicts a wide range of real-world behaviors, creating a need to understand what generates the hyperbolic pattern. We provide evidence that hyperbolic discounting reflects mistakes that are driven by the complexity of evaluating delayed payoffs. In particular, we document that hyperbolicity (i) is strongly associated with choice inconsistency and cognitive uncertainty, (ii) increases in overt complexity manipulations and (iii) arises nearly identically in computationally similar tasks that involve no actual payoff delays. Our results suggest that even if people had exponential discount functions, complexity-driven mistakes would cause them to make hyperbolic choices. We examine which experimental techniques to estimate present bias are (not) confounded by complexity.

Suggested Citation

  • Benjamin Enke & Thomas Graeber & Ryan Oprea & Thomas W. Graeber, 2023. "Complexity and Hyperbolic Discounting," CESifo Working Paper Series 10861, CESifo.
  • Handle: RePEc:ces:ceswps:_10861
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    References listed on IDEAS

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    1. Thomas Graeber & Shakked Noy & Christopher Roth, 2024. "Lost in Transmission," ECONtribute Discussion Papers Series 272, University of Bonn and University of Cologne, Germany.
    2. Niklas M. Witzig, 2024. "Cognitive Noise and Altruistic Preferences," Papers 2410.07647, arXiv.org.

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    More about this item

    Keywords

    hyperbolic discounting; present bias; bounded rationality; cognitive uncertainty;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G00 - Financial Economics - - General - - - General

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