COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1719 Hyperbolic Discounting Is Rational: Valuing the Far Future with Uncertain Discount Rates J. Doyne Farmer and John Geanakoplos August 2009 Conventional 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. |
