Hyperbolic Discounting


Health Economics

  • This characterizes time preference when there is a relatively high discount rate over short and early periods but a lower rate on equally short but distant periods. This evidently creates a conflict between today's preferences and those of the future, since in the future what was originally distant and not heavily discounted now becomes near and heavily discounted. Thus, if I decide today to quit smoking next year but, when next year arrives, decide to carry on for a further year, then I am behaving as though I had a hyperbolic discount function. This finding about intertemporal preferences comes mainly from experiments in cognitive psychology to the effect that people often prefer low early benefits over high later ones when the low benefits are immanent but, when they are more distant in time, there is a preference reversal. Thus, if offered the choice between 90 now and 100 in a year's time one may choose the immediate 90. However, given a different choice of 90 in five years' time or 100 after six, they prefer the 100 even though the benefits are identical and equally postponed. This is inconsistent with the standard analysis of time preference and discounting. It seems to be a particular characteristic of addicts.